While long expected, the move by Dell Technologies (NYSE:DELL) to divest its stake in VMware (NYSE:VMW) still has the power to excite investors who are pushing DELL stock up more than 8% in pre-market trading following the spinoff news.
VMW stock is up 2.26%, extending a year-to-date climb of near 11% through yesterday’s close. Over the last 12 months of trading, DELL stock is up over 128%. Dell will distribute its approximately 81% ownership interest in VMware to its shareholders.
Back in 2016, Dell bought EMC, which controlled VMware, for $67 billion. Five years later, debt from that deal — more than $45 billion — remains on Dell’s books. VMware, meanwhile, has debts of just $3.8 billion, and a cash balance of $3 billion.
VMware will need to borrow money to pay a special dividend to its shareholders, including Dell, which owns 81% of it. Dell’s part of the cash, about $9.5 billion, will be used to retire its debt. The two companies will remain closely linked for at least five years.
DELL Stock Gets Big Win
Analysts have expected this big win, seeing that it will unlock Dell’s value in hardware, where many of its products are considered leaders in the Gartner (NYSE:IT) “magic quadrant” analysis. The company is accelerating its move from hardware sales to subscription services. Dell Technologies on Demand is part of a market that will represent 15% of PC deployments in 2022. The Dell Solution is also offered by its 2,000 partners.
Dell still sells PCs. Its Inspiron laptops are priced as low as $300. Its servers use chips from Intel (NASDAQ:INTC), Advanced Micro Devices (NYSE:AMD) and Nvidia (NASDAQ:NVDA), and Dell is the leader in that market.
The VMware sale should have even more analysts pounding the table for DELL stock. Of 10 analysts tracked by TipRanks, eight are saying buy it, even though their average price target is just 1.4% higher than where it closed before the spinoff announcement.
Meanwhile, there could be some fallout for VMware. Moody’s Investors Service on Thursday placed VMW’s Baa2 senior unsecured rating under review for a downgrade following the announcement that VMware will issue a special cash dividend of $11.5 billion to $12 billion in conjunction with Dell’s decision to distribute its ownership interest in VMware to its shareholders.
On the date of publication, Robert Lakin did not have (either directly or indirectly) any positions in the securities mentioned in this article.
InvestorPlace contributor Robert Lakin is a veteran financial writer and editor, including stints with Bloomberg News and as a sell-side equities research editor.