August 19, 2019

Breakingviews: Dell cleans house further with pivot on Pivotal

by Breakingviews.

Michael Dell is pivoting on Pivotal Software. Less than two years after Dell Technologies floated the offshoot, another listed company controlled by Dell, the $58 billion VMware, looks set to buy out Pivotal’s minority owners at a $4 billion valuation. It looks like a sensible simplification of the empire’s structure at a reasonable price.

The complex deals engineered by Michael Dell and his partners – taking his eponymous firm private, buying EMC for $67 billion in 2016, buying back tracking stock issued as part of that leveraged buyout, and floating Dell on the public market again – have left investors mistrustful and owning bits of three separate, overlapping listed firms. Dell Technologies has a market capitalization of around $34 billion, while Pivotal’s worth was a bit over $2 billion at the close on Wednesday, before the companies outlined their talks.

It wasn’t supposed to end this way. Pivotal’s initial public offering in 2018 at $15 a share was intended to allow the maker of tools for cloud software to grow rapidly on its own steam. That hasn’t happened, and the stock lost nearly half its value – enabling VMware to contemplate buying it at the same price it went public.

That said, there’s some logic to VMware owning Pivotal. Both are developing software based on a standard that permits blocks of code to run on clusters of machines, whether owned by private firms or cloud giants like Combining the two efforts might reduce needed investment. And VMware already owns about 16% of Pivotal, and its parent Dell holds nearly half. Only the outside investors would be paid a cash premium.

Dell’s benefit is less clear. VMware is aiming to get its parent’s stake in Pivotal in return for shares based on unaffected stock prices, suggesting no premium for Dell – though that company’s stake in VMware would increase.

As with Dell’s move to eradicate tracking stock tied to VMware last year, there could be gains from reduced complexity. That transaction was controversial, though, with some investors perceiving that the biggest beneficiary was Michael Dell himself. At least the Pivotal deal, if it happens, has the selling point that outside shareholders seem to be getting the largest immediate payoff.


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