Dell Eyes New Route For Potential VMware Merger

In the latest twist of the Dell-VMware saga, a public disclosure Dell filed Thursday with federal regulators disclosed the privately held company is evaluating an additional potential route to a merger with VMware.

Dell said it is now soliciting input from investors in a Dell tracking stock linked to the VMware business in order to gauge interest in an arrangement that would allow holders of the tracking stock, DVMT, to retain complete shares of Dell.

That option, according to an SEC filing, amounts to a conversion of Dell common stock, which is owned by Michael Dell and private equity firm Silver Lake, into shares of the Dell VMware tracking stock. The arrangement would allow Michael Dell and private equity firm Silver Lake Partners to exchange common stock for shares of the publicly traded tracking stock. It would also allow holders of the tracking stock, including hedge fund Elliott Management, to hold complete shares of Dell.

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That option is being considered in addition to a reverse merger, which would allow combined Dell-VMware shares to be publicly traded, an IPO, or doing nothing.

’The content of yesterday’s 8-K filing is a continuation of the exploratory phase previously outlined in our February 13D/A filing," said a Dell spokesperson. "We continue to evaluate a number of potential business opportunities as part of our ongoing multi-year strategic planning, and we do so from a position of financial and business strength.’

A VMware spokesperson said the company had no comment.

Investors in both the tracking stock and VMware's publicly traded shares seemed pleased by Dell's latest tack on exploring merger options and the potential of an exchange of stock.

Share of DVMT, closed up $4.49 or four percent Friday to $78.81. VMware shares, meanwhile, closed up $1.48 or one percent to $138.99.

As part of the process, Dell's board has also appointed two directors to independently represent VMware shareholders. Both David Dorman, co-founder of Centerview Capital Technology, and currently chairman of the CVS Health board of directors, and William Green, former CEO and chairman of system integration behemoth Accenture, would have to approve any deal involving the VMware tracker stock, as would the majority of shareholders outside of Dell.

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Dell has retained Evercore Group as a financial advisor to the two-man "special committee" that could act as a liaison between Dorman and Green, and VMware investors.

Dell currently owns roughly 82 percent of VMware through its 2016 acquisition of EMC. About half that equity is traded through the tracker stock.

Sonia St. Charles, CEO of the Davenport Group, a St. Paul, Minn., solution provider that works with both Dell EMC and VMware, said she's keeping an eye on the potential moves the companies could make, and expects that any option that includes Michael Dell as CEO would be positive.

"I think it's a paper transaction, and Dell will once again be a public company," St. Charles said. "As long as Michael Dell is at the helm, the commitment to the customer and the channel will not change. We're significant VMware partners, as well as Dell partners. For our business, it's going to be positive. I think it's all part of the plan that came out of the acquisition [of EMC], and these things will happen for years."

Dell had been previously considering a reverse merger as a speedy route to once again becoming a public company. That option, which would avoid a cumbersome IPO process, was panned by VMware's shareholders as a deal that would benefit Dell Technologies, and its founder Michael Dell, at their expense.

In March, one of VMware's largest independent shareholders, Jericho Capital, sent off a sharply worded protest against a reverse merger with Dell, arguing that plan would undermine VMware's successful growth strategy to service Dell's massive debt.

"Even the most casual observer can see that [VMware] gains nothing by saddling the Company’s faster growth, net cash, highly strategic software business with the dead weight of Dell’s slower growth, heavily debt-laden, legacy hardware-dependent entity," wrote Josh Resnick, managing member of the firm that owns 1.8 percent of the virtualization leader.

Carl Icahn, the activist investor who famously clashed a few years back with Dell Technologies CEO and founder Michael Dell, has also taken a stake in VMware, CNBC reported last month.

Icahn did not have to reveal his ’medium-sized’ investment in VMware publicly because it falls below the SEC-mandated five percent disclosure threshold, according to the news network, which cited unnamed sources.