What Should Dell Do About VMware?

On Tuesday, The Wall Street Journal reported that Dell Technologies DELL is evaluating options to pursue with its 81% ownership stake of VMware VMW. Scenarios include Dell spinning off its approximately $50 billion VMware stake, Dell purchasing the rest of VMware, or possibly taking no action. Both stocks popped on the news on the morning of June 24, with no-moat Dell up 14% and narrow-moat VMware up 8% before trading opened. We are maintaining our fair value estimates of $65 for Dell and $202 for VMware. Both companies remain undervalued, while we still consider VMware to be a Best Idea within the tech sector.

If Dell were to spin off VMware, we believe this could be a positive for investors and benefit both firms. VMware's ownership profile, which we think has a drag on the stock, would become independent, and the company can focus on its pursuit of being the glue between the large public cloud providers and enterprise networks. We believe Dell could shore up its balance sheet and start getting recognition for being one of the major players in the IT infrastructure and PC markets.

If Dell were to acquire the remaining shares of VMware, we believe this could be positive for Dell but potentially inhibit VMware in the long run. While we recognize the important synergies associated between VMware and Dell's sales channel, we believe that VMware's ability to forge tight relationships with Dell's competitors could sour. For Dell, a combined entity would provide Dell with a more unified company that could bring exclusive VMware-based technology offerings to the market.

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