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Dell’s final deal with VMware is a big win for VMware CEO Pat Gelsinger — with one caveat (VMW)

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After months of boardroom battles, publicly hinted about in SEC filings and news articles, VMware Pat Gelsinger has won the war with his boss Michael Dell.

Dell’s enormous tech company, Dell Technologies, will not be gobbling up VMware outright in a reverse merger. It has instead entered into a less-intrusive deal that accomplishes much of the same goal.

Dell Technologies will swap shares of itself for the publicly traded “tracking” shares of VMware, owned by a wholly owned subsidiary of Dell. Dell is essentially buying this subsidiary.

Those tracking shares were created as part of Dell’s massive, complicated $65 billion buyout of EMC, originally issued to EMC shareholders, as a way to reduce the amount of money Dell needed to borrow to pay for EMC. It gave EMC shareholders something of value besides more cash to represent their stake of VMware.

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VMware is a publicly traded company with about 80% of its shares owned by EMC following Dell’s buyout. So Dell Technologies controlled that 80% after buying EMC, with about half of that equity publicly traded through the tracking stock.

The tracking stock was publicly trading. By swapping shares of Dell Technologies, formerly a private company, for the tracking shares, Dell will become a public company again.

This deal is mostly a big win for VMware CEO Pat Gelsinger as it essentially maintains the status quo of VMware’s ownership.

Dell still controls most of VMware, but the 20% of VMware that is public will remain public and VMware will continue to be an independent company.

Dell had previously been talking about a “reverse merger” with VMware, in which Dell would have essentially sold itself to the smaller company. This too, would have made Dell public again, but VMware would not have been independent anymore, and its shareholders would be responsible for the roughly $50 billion of debt Dell still has on its books.

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In practice, it would have been a fully-owned unit of Dell under CEO Michael Dell.

Dell wanted VMware for a number of reasons, including to get his hands on VMware’s cash and help him pay off Dell’s debt more quickly.

Avoiding a near death sentence

Being closely aligned with VMware has been good for Dell. Dell and VMware have been making their products work well together, which lets them compete better with joint rivals like Nutanix.

But operating independently is also extremely important for VMware’s survival. VMware’s flagship software for servers needs to be able to work well on all sorts of hardware, even hardware sold by Dell’s rivals like Hewlett Packard Enterprise.

So there was a lot of backlash to the reverse merger idea from the VMware crowd, with Wall Street analysts panning the idea, and VMware shareholders openly revolting against the idea.

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This deal allows Gelsinger to sidesteps that potential death sentence to VMware’s future. It also means he won’t be demoted, a situation that may have pushed him into the arms of his former employer, Intel, who is looking for a new CEO.

That nuance wasn’t lost on Michael Dell. People have been talking about Gelsinger as Intel’s next CEO so much that when Gelsinger publicly tweeted he wasn’t interested in the job, that tweet was immediately noticed by his boss, Michael Dell.

The big caveat

But there’s a big caveat to this win: VMware is footing the bill for it.

Stockholders of the tracking stock can opt to tender their shares for $109 in cash, a 29% premium over Friday’s closing price, if they don’t want the 1.3665 shares of Dell Technologies in exchange. Dell has capped the budget it will pay for these stocks at $9 billion.

That money is coming from VMware, with a special massive dividend of $11 billion paid to all of its shareholders, using up its stash of cash.

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Before Dell bought EMC, its former CEO Joe Tuchi and one of its board members promised that Dell wouldn’t raid VMware’s cash. That promise obviously didn’t last, although VMware also emphasized that this is to be a one-time deal.

Still, it was an artful escape by Gelsinger and his board.

And Gelsinger’s official comment hints as much (emphasis ours): “We remain laser focused on our strategy to deliver innovative software that drives customer success as a strategic and growing independent entity,” he said.

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