What Dell going public again means – HINT – very little

The announcement of a stock swap that will return Dell Technologies to public trading appears to conflict with everything Michael Dell has said for years about the benefits of being private versus being public. That may not be the case, however.

Dell Technologies CEO Michael Dell

This morning, Dell Technologies CEO Michael Dell appeared to confirm a report in the Wall Street Journal on Sunday evening that Dell will once again go public – when he tweeted out a copy of a Monday article in the New York Times on the transaction. The Journal reported that Dell and Silver Lake, his investment partner, will take the company public through a complicated share swap, in which it will spend $21.7 billion to purchase a publicly-traded special class of shares that Dell created in 2016 to create an equity component to assist in its purchase of EMC. That stock, known by its ticker name of DVMT, tracks the performance of Dell’s 82 per cent stake in VMware, one of the former EMC Federation companies which Dell has integrated more closely into its operations than EMC did, while still allowing it to remain independent and preserve its relationships with Dell competitors. Since that stock is publicly traded, the move will  essentially make Dell a public company once again. The deal was reportedly approved by the boards of Dell and VMware late Sunday.

The deal will see Dell offer either $109 a share in cash or 1.3665 shares of newly issued Class C stock for each share of DVMT, which has more than doubled in value since it was established. The offer is 29 per cent above the Friday closing price of DVMT shares.

For Michael Dell and Silver Lake, the beauty of the transaction is that it allows them to retain effective control of the company, as the special shares held by Mr. Dell and Silver Lake would give them more votes than other investors.

For Michael Dell, there is also a challenge here of sorts. Since the idea of Dell originally going private was conceived, during his fight against activist investor Carl Icahn, Michael Dell has strongly emphasized the many benefits of being private over being public. He has continued to forcefully maintain that position in public since, particularly in emphasizing the advantages it gives them developing road maps for the long term rather than the quarterly reports. Does the 180-degree reversal create questions about Michael Dell’s credibility? Analyst Patrick Moorhead, President and Principal Analyst of Moor Insights & Strategy, thinks not. Moorhead thinks that the underlying circumstances have changed, in that the strategic goal of transforming Dell into an enterprise player able to deal with modern digital transformation has largely been accomplished.

“Dell Technologies did what it had to do as a private company that would have been more difficult as a public one,” Moorhead said. “It shed investments like its legacy services and software divisions, made investments, the biggest being EMC and a majority of VMware, and had the time to revamp its product lines and processes. The equity markets are on fire now and given the state of the company’s turnaround, it makes a lot of sense to me.”

Moorhead emphasized that Dell Technologies has a much stronger portfolio and strategy around key growth areas than it did when the company went private.

“The company’s go-forward opportunities in IoT, the edge, AI and connectivity are very profitable ones, buttressed especially by software and services from VMware, RSA, Secureworks and Pivotal,” he said. “There are still good profit pools in storage, HCI and networking infrastructure, and going forward, machine learning.”

Moorhead doesn’t see any negatives for Dell in the deal, as nothing is apparent that will alarm markets, or change Dell’s business model, including its channel relationships.

“I don’t expect any negative customer impact, as nothing but the financial structure will change,” he said. “According to the company, no strategic or management changes will be made as a result, and Michael Dell will still own 47 per cent to 54 per cent of the company. Dell loses its ability to be as nimble from quarter to quarter, but the reality is that it had to file quarterly reports anyways, given its VMware stake. The street will scrutinize its GAAP versus non-GAAP numbers but as I have tracked those numbers for years, the two have come closer together.

“Paying down the debt will be key, but unless some giant, industry downturn takes place, I don’t see that as an issue,” Moorhead added. “The company paid down 25% of its $42B debt in two years and cash flow is strong.”