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Personal computer and server giant Dell Technologies Inc. today said it’s exploring a possible spinoff of its 81% stake in computer virtualization software firm VMware Inc.

The aim of the deal, outlined in a Schedule 13D filing today with the Securities and Exchange Commission, would be to provide more value for Dell shareholders by removing what’s often called the “conglomerate tax.” In this case, that means the value of Dell’s shares, currently at $39 billion, indicates zero value for VMware despite the latter’s higher revenue growth and profit margins and $58 billion market value as a public company itself.

The idea would be to spin off Dell’s 81% stake, worth about $47 billion at VMware’s stock price today, to VMware shareholders, establishing a clearer market value for both Dell and VMware stock and simplifying each company’s capital structures. “It removes the overhang from Dell’s stock,” said Dave Vellante, SiliconANGLE Media co-chief executive and chief analyst at SiliconANGLE sister market research company Wikibon.

The details remain murky, not least because according to the 13D, “this process is currently only at an exploratory stage.” Dell also said it “continues to evaluate a range of strategic options, including maintaining the status quo with respect to its ownership interest in VMware.”

Dell added that it believes a spinoff “could benefit both Dell Technologies’ and VMware’s stockholders by simplifying capital structures and enhancing strategic flexibility, while still maintaining a mutually beneficial strategic and commercial partnership.”

Shareholders of both companies appeared to like the outlines of the deal, as Dell’s shares rose almost 8% and VMware’s about 2% in extended trading. Update: On Thursday, shares of Dell closed up more than 12%, to $59.10, while VMware’s shares edged up 0.12%, to $139.87.

In particular, Dell intends to negotiate a special cash dividend by VMware, which would be “paid substantially concurrently with the Spin-off on a pro rata basis to all VMware stockholders.” Dell said in the filing that it expects that to be paid by VMware raising more debt, essentially transferring at least some of Dell’s considerable debt from its $67 billion acquisition in 2016 of storage giant EMC Corp., which owned VMware. Dell added that it expects to use its pro rata portion of the dividend to repay its own debt.

Vellante noted that it’s not certain how non-Dell shareholders or credit rating agencies would view VMware taking on more debt in addition to its current $5.7 billion in short- and long-term debt. Dell said its goal would be to “1) maintain VMware’s credit rating of investment grade and (2) improve Dell Technologies’ credit rating at, or shortly following consummation of, the Spin-off. However, Dell Technologies can give no assurance that any specific ratings would ultimately be obtained for either company in the event of a Spin-off.”

And there could be another benefit for Dell: “We expect a spin of VMW to be accompanied by a substantial cash dividend that allows core Dell to more quickly achieve an investment grade credit rating,” Morgan Stanley analyst Katy Huberty wrote in a note to clients.

The two companies would intend to maintain their commercial relationship. “This includes go-to-market, services, research and development, and intellectual property agreements between Dell Technologies and VMware, providing ongoing strategic benefits and continued support for customers of both companies following any spin-off,” Dell said in the filing.

“The strategic relationship between Dell Technologies and VMware has never been stronger,” Michael Dell (pictured), chairman and chief executive officer of Dell Technologies, said in a statement. “For more than 20 years, we’ve innovated for our customers and created substantial growth and value for both companies and our teams. Regardless of the options we are exploring to create additional value, we are accelerating our strategy — which remains unchanged. We are focused on winning in the consolidating markets where we operate and innovating across the Dell Technologies portfolio to create integrated solutions that turn data into insights and action.”

Dell said a spinoff in any case wouldn’t happen before Sept. 21 because it intends for it to be tax-free and it would have to be taxed if it were done before that date. It’s also not clear how VMware would pay the dividend, which because of its huge size and VMware’s mere $3 billion in cash would depend on raising much more debt. It seems likely that VMware would need to pay the money to Dell over a period of years.

Vellante, who recently analyzed this deal as one of five major possibilities for the two companies’ relationship, said a deal of this sort would unlock the value of both Dell and VMware by removing the conglomerate hangover for Dell and potentially attract more sideline investors into VMware’s stock.

“It would be good for VMware customers,” he added. “VMware gets full autonomy and control over its destiny. VMware’s technology ecosystem partners — aka Dell’s competitors, such as HPE, IBM, NetApp and others, would like it, although they are already well down the path of looking to optimize VMware alternatives.”

But there are potential downsides for both companies. Not least there’s the debt VMware would take on. “This is the price of freedom for VMware,” Vellante said.

As for Dell, Vellante said it will no longer have the benefits of VMware’s growing, lucrative business on its book, something that makes it a less interesting company both to investors and to chief information officers. “Its strategic importance to customers will be highly dependent on the terms of the commercial agreement with VMware,” he said.

Dell and VMware both posted better-than-expected financial results in late May, sending their stocks soaring. Both have enjoyed tailwinds from the pandemic — VMware with licenses for its growing line of end-user computing products such as virtual desktop infrastructure and Dell for strong personal computer sales as home-working employees beefed up their desktop horsepower.

VMware in particular has seen strong growth thanks to a multiyear effort to provide technologies for hybrid cloud setups in which companies combine their on-premises data centers where VMware dominates with public cloud services from the likes of Amazon Web Services Inc., with which VMware has a strong relationship. Dell, however, has continued to struggle with growth in enterprise systems and storage.

Here’s a quick analysis from Vellante and SiliconANGLE co-CEO John Furrier:

Photo: SiliconANGLE