VMware's spinoff from Dell is a 'fork in the road' that comes with big opportunities but plenty of risk

  • VMware is spinning out of Dell and the split will have both benefits and challenges, analysts say.
  • It could allow VMware to have more flexibility in partnering with Dell rivals.
  • However, it could also exacerbate existing uncertainty for the firm. 
  • See more stories on Insider’s business page.

Dell’s long-awaited announcement that it plans to spin off its 81% stake in VMware has analysts feeling cautiously optimistic: The move could be a win for both companies, they say, though the road to success won’t be easy. 

The separation — expected to complete in the fourth quarter — will create two standalone companies “while preserving the VMware-Dell experience” through a five-year agreement to collaborate on products and sales, VMware interim CEO Zane Rowe explained on an investor call. 

In some ways, the announcement is just a “formality,” since VMware had been operating largely independently under the Dell umbrella, said Futurum Research founding partner Daniel Newman. Still, the spinoff will likely bring more value to shareholders (who will be receiving 0.44 shares of VMware for each of their Dell shares), he said, thanks to the opportunities ahead. 

Here’s what he and six other experts expect from the shift:

Opportunities abound for both firms 

The two companies first came together when Dell bought EMC — and its economic interest in VMware — for around $67 billion in 2015. The idea was that the companies could combine forces selling products for data centers, cloud, security, and more as they had all been facing pressure from cloud giants like Amazon Web Services.

Specifically, VMware could help Dell in the transition to the cloud, while Dell’s sales capabilities could help VMware.

Analysts believe these benefits will likely remain post-split given that the two companies plans to continue to collaborate on multi-cloud products, telecommunications and 5G technology, and sales for at least five years (with automatic one-year renewals afterwards).

“I see little downside for VMware so long as the partnership remains strong, as is being suggested by the companies during this transition,” Newman told Insider. 

Plus, VMware gets the added benefit of increased freedom:

The firm will have “more flexibility to choose its own destiny and pursue a non-conflicted strategy,” Mizuho managing director Gregg Moskowitz wrote in a note to clients.

For example, VMware could partner with other hardware providers (and Dell competitors) like HP, Cisco, Lenovo, and IBM – bringing on more revenue opportunities.

“We like the transaction as it removes some uncertainty from the stock and gives the company increased flexibility to exercise its independent growth strategy while maintaining its strategic relationship with Dell,” Matt Hedberg, managing director at RBC Capital Markets, wrote in a note to clients. 

Dell, meanwhile, now has more incentive to expand beyond VMware to look for other potential cloud partnerships and investments, Newman said. 

“VMware was an important component to Dell’s growing cloud narrative, so some may see this as a negative move, but I don’t see it slowing Dell’s progress in transitioning to more robust cloud offerings,” Newman said. “If anything this will open the door to further expansion in this area.”

Dell is also making this move at an “opportune” moment: The pandemic was tough on its manufacturers, Newman said, and this move provides a payout to shareholders. 

“The company improves its balance sheet and debt situation, while unlocking value that was tied up in the existing cap structure,” Newman said. “This means a good moment for shareholders, and concurrently it helps Dell return to investment grade.”

The looming questions each firm faces

Still, there are hurdles and growth challenges that lie ahead for both companies.

There’s especially a “fork in the road” for VMware, Wedbush Securities managing director Dan Ives told Insider. 

“Do they narrow their strategic focus? Do they accelerate their growth on the networking side? How do they stand to benefit by finding success either on the cybersecurity piece or cloud?” Ives said. “Right now VMware is a company at the crossroads.”

What’s more, there isn’t a “massive appetite for VMware’s stock” now, he added.

Many things are in flux for VMware: It’s been transitioning to a software subscription model, and it’s on the lookout for a new CEO since former CEO Pat Gelsinger departed to head up Intel earlier this year. Other executives have also recently departed from the company.

“Our concern is that this state of flux combined with the change in corporate structure could pressure the company’s ability to execute in the near-to-medium term,” William Blair’s Jason Ader wrote in a note to clients. 

Now that Dell has formally announced the deal, VMware really needs a new CEO. 

“The company as a whole is very healthy but it needs a leader to establish itself as an independent company very quickly,” Sid Nag, VP analyst at Gartner, told Insider. 

VMware will also need to navigate how it maintains a role amidst larger competitors in the cloud world. 

“We’d like to have clarity on the new CEO choice but the bigger variable is how VMware will be impacted by what is shaping up to be the biggest year of workload migrations into AWS, Microsoft Azure, and Google Cloud that we’ve ever seen,” Karl Keirstead, managing director at UBS, wrote in a note.

VMware has formed partnerships with cloud giants like AWS and Microsoft, but in the long term, cloud providers could possibly “cannibalize” VMware’s business, Forrester vice president and research director Glenn O’Donnell said. 

VMware’s transition to selling more software and hybrid cloud subscriptions is likely to improve its business, although Mizuho’s Moskowitz says he’s not confident that it will “execute smoothly going forward” and is “cautious” about its business for data center products.

There’s also uncertainty about how Dell CEO Michael Dell’s continued ownership could affect VMware’s future decisions, as he will still be the firm’s chairman and its largest shareholder. 

Dell, meanwhile, will need to lean into its software potential. 

“Every company needs software assets,” Forrester’s O’Donnell said. “A lot of its software was within the VMware umbrella. How will it develop software internally? That’s something the company will have to work on pretty aggressively. The partnership will still be there but still some stuff Dell has to do on its own.”

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