Spinoff Will Benefit Dell and VMWare

As anticipated, no-moat Dell Technologies DELL announced it will spin off its 81% equity ownership of narrow-moat VMware VMW in the last quarter of calendar 2021. We believe this spinoff is beneficial for both companies, as well as the shareholders of both firms. We are maintaining our fair value estimates of $75 for Dell and $202 for VMware until the spinoff is consummated, along with our moat ratings for both firms. At that time, all else equal, our fair value estimate for Dell will likely decrease as VMware is spun off, although Dell shareholders will not lose value as they receive additional VMware shares. Our VMware fair value would also likely decline as it will pay out a hefty dividend to all shareholders (including Dell) upon exit, but again, VMware shareholders will not lose value. Regardless, VMware remains undervalued (with shares up only modestly after hours) and one of our top picks within the tech sector. Dell shares are up about 9% on the news and remain overvalued.

As part of the spinoff, VMware will pay a special cash dividend of $11.5 billion to $12 billion to all VMware shareholders ($27.43-$28.62 per share) and Dell shareholders will receive 0.44 shares of VMware for each Dell share. The special dividend is larger than we anticipated, but we believe VMware’s solid free cash flow generation affords such flexibility and it is worth the spinoff for the long-term opportunity.

Strategically, we believe VMware gains focus and can accelerate its any application, any cloud strategy as an independent vendor. VMware will have a simplified ownership and governance structure post spinoff as it moves to a single share class structure as a standalone entity, and Dell can reduce its debt burden. While we believe Dell shareholders reap the rewards of the VMware spinoff, longer-term growth and margin expansion capabilities at Dell could be pressured without VMware. We expect Dell to grow around GDP and focus on operating margin and earnings growth over the long term.

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