Dell Technologies has confirmed long-standing rumors that it will spin off its virtualization and cloud subsidiary VMware. Dell stock surged on the news, which gives the company a $10 billion dividend.

VMware has been looking for independence and Dell has been planning for some time to sell its 81 percent stake in the company which it acquired as part of its giant $67 billion merger with EMC in 2016 (still the largest tech merger of all time). Dell stock jumped nine percent on Wednesday after the deal was announced. It can't complete until later this year, as the deal does not become tax-free until September 2021.

Dell is also reported to be considering selling its platform-as-a-service and data warehousing subsidiary Boomi.

At VMware's headquarters in Palo Alto, California. Source: VMware Facebook page
– VMware

VMware unbound

The deal will make little practical difference to the operation of VMware, which has been operating under its own brand since the 2016 merger, as the leading player in enterprise private cloud software. It will continue to operate as a partner to Dell and other tech players.

The spin-off, which Dell has been planning since 2020, is driven by Dell's financial maneuvering. When Dell made its heavily leveraged merger with EMC in 2016, it left VMware with 19 percent of its stock trading publicly, and issued a "tracking stock" that would track Dell's stake in VMware. In 2018, Dell Technologies went public without an actual IPO, by converting that tracking stock into actual Dell stock.

The new announcement untangles that, and happens under the guidance of Silver Lake Partners, which financed the purchase of EMC. The VMware board has approved a deal that gives a $12 billion cash dividend - most of it going to Dell Technologies and wiping out the 81 percent ownership.

“We will have an enhanced ability to extend our ecosystem across all cloud vendors and on-premises infrastructure vendors and a capital structure that will support growth opportunities,” said VMware CEO/CFO Zane Rowe, who has led the company since the departure of long-serving VMware CEO Pat Gelsinger, who became CEO of Intel in January 2021.

“By spinning off VMware, we expect to drive additional growth opportunities for Dell Technologies as well as VMware, and unlock significant value for stakeholders," said Michael Dell, chairman of the board, VMware. “Both companies will remain important partners, with a differentiated advantage in how we bring solutions to customers.”

VMware's strength is in virtualization software used for enterprise and private cloud installations. It did attempt to launch a public cloud service vCloud Air, in competition with Amazon Web Services. When this failed to thrive, it was sold to European cloud player OVH, which continues to operate it.