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Why Shares of Dell Technologies Rose 11.5% in April

By Billy Duberstein - May 8, 2021 at 8:00AM

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Dell confirmed a previous strategy to spin off its stake in VMware.

What happened

Shares of Dell Technologies (DELL 2.32%) rose 11.5% in April, according to data provided by S&P Global Market Intelligence. The server and laptop assembler officially confirmed in a press release that it would be spinning off its near-81% stake in hyper-converged software company VMware (VMW 1.21%) after September of this year.

While Dell had first announced its intention to make this move last summer, the new confirmation also provided more concrete details about the transaction, which included very good news for Dell shareholders.

Two women in a server room.

Image source: Getty Images.

So what

Under the terms of the deal, VMware will pay an $11.5 billion to $12 billion special dividend to all shareholders (about $28 per share), meaning Dell's stake will bring in a fresh $9.3 billion to $9.7 billion after the spinoff. That will go a long way toward paying off Dell's hefty debt load, which it took on in 2016 after it acquired EMC.

VMware's remaining 19% of shares are publicly traded, and when subtracting Dell's proportional stake in VMware, the remaining "core" of Dell, which primarily consists of enterprise servers, desktops, and PCs, looks very cheap indeed. And that's even after a 36% gain year to date.

Now what

The spinoff is still subject to a favorable opinion from the IRS on the tax-free nature of the move, but provided that happens, Dell shareholders still have a lot to look forward to. As the calendar turned to May, Dell also announced it would be selling off its Boomi data integration software business to a private equity firm for another $4 billion, adding more cash to its balance sheet and further focusing the company on its core server and PC business.

The market for PCs and laptops is growing better than it has in years, thanks to work-from-home trends. Given that more companies are likely to adopt a hybrid office-and-home posture for employees even post-pandemic, some of that strength is likely to linger in this year and beyond.

With a stronger balance sheet and a renewed focus on that core business, Dell could unlock lots of value for its shareholders in 2021.

Billy Duberstein owns shares of Dell Technologies Inc. His clients may own shares of the companies mentioned. The Motley Fool recommends VMware. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Dell Technologies Inc. Stock Quote
Dell Technologies Inc.
$48.94 (2.32%) $1.11
VMware, Inc. Stock Quote
VMware, Inc.
$122.44 (1.21%) $1.46

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