Silver Lake, Elliott Management Favor VMware Spin-off From Dell: Report

'Michael [Dell] is always looking at the benefit of his stockholders and his company. There's no doubt there's a strategic rationale as to why he is looking at this, whether it's from a tax perspective, from a shareholder awareness perspective or shareholder value perspective,' one Dell partner says.

Several large Dell Technologies shareholders reportedly favor a spin-off of VMware that would help the IT hardware giant avoid major tax costs.

CNBC reported Friday that private equity firm Silver Lake, which owned a 28.6 percent stake in Dell as of January, and hedge fund Elliott Management are among the shareholders that favor the spin-off plan over the alternate proposal of Dell buying the remaining shares of VMware. Dell's exploration of the two options was first reported by The Wall Street Journal Tuesday.

[Related: 5 Big Things To Know About Dell Selling (Or Buying) VMware]

VMware and Dell spokespeople said they do not comment on rumor or speculation. CRN has reached out to both Silver Lake and Elliott Management.

The CNBC report, which cited unnamed sources familiar with the deliberations, said the Round Rock, Texas-based company would rather spin off its shares of VMware to Dell shareholders in a tax-free transaction than sell off its stake, which could result in a multi-million tax burden. The report said the spin-off could involve VMware paying a large special dividend to Dell that would effectively shift some of Dell's large amount of debt to VMware.

The possibility of Dell buying the remaining shares in VMware, for which it currently owns 81 percent, seems less likely, CNBC's sources said, because Dell would likely have to take on more debt, and it could be disliked by VMware employees who want their equity incentives tied to VMware's growth.

Dell became VMware's majority owner through its $67 billion acquisition of EMC in 2016. Then in 2018, the company went public as part of a share swap with its DVMT VMware tracking stock — a deal that had been criticized by Elliott Management and supported by Silver Lake.

Bob Venero, CEO of Holbrook, N.Y.-based Future Tech Enterprise, No. 96 on CRN's Solution Provider 500 for 2020, said there's "definitely a rationale" for Dell seeking to spin off VMware.

"Michael [Dell] is always looking at the benefit of his stockholders and his company," he said. "There's no doubt there's a strategic rationale as to why he is looking at this, whether it's from a tax perspective, from a shareholder awareness perspective or shareholder value perspective."

Should such a transaction happen, Venero said he doesn't expect any big changes from a channel perspective, adding that Dell has already given VMware a lot of latitude to be "cross-platform" and "cross-OEM."

"I don't see that as an impact to what is happening out there in the market and the industry," he said. "As long as there are no material challenges associated with the spinout, then it should be business as usual. The people that can take advantage of this will, and they will be successful with it and the people that don't, don't. This isn't one of those blockbusters."

In a recent interview with CRN, Michael Dell pointed to major traction for the joint technology innovation between VMware and Dell Technologies.

"If you look at what we did with VxRail and VxRack, just as an interesting example, those two combined have generated more than $4.5 billion in orders since inception. We’ve actually been exceeding the ambitious targets that we set for ourselves there. Those solutions continue to grow and get better," Dell said. "Now we have those with VMware Cloud Foundation, and we continue to enhance the combined solutions with the Dell Technologies Cloud, with Unified Workspace, with our SmartFabric Director—the innovation engine is on high."