VMware Inc. today became an independent company after completing its spinoff from former parent company Dell Technologies Inc., a move that has been in the works for several quarters.

VMware, which has a market capitalization of more than $63 billion as of this morning, is a top provider of software for managing data center and cloud infrastructure. The company launched in 1998 and was acquired by data storage maker EMC six years later for $625 million. VMware became part of Dell when the latter bought EMC in 2016. 

Dell paid $67 billion for the acquisition of EMC. The deal ranks as the tech industry’s single most expensive acquisition to this day.

VMware grew from a $625 million valuation in 2004, when it became part of EMC, to more than 100 times that amount today by establishing itself as one of the leading makers of software for managing information technology infrastructure. The company’s virtualization technology is ubiquitous in enterprise data centers, where it helps companies make more efficient use of their hardware and simplify maintenance operations. VMware’s software is also widely used in public cloud environments and the company has a presence in several other parts of the IT market as well, including the lucrative cybersecurity segment.

Dell announced its plan to turn VMware into a separate company in April. Prior to the spinoff, Dell had a 81% stake in the virtualization giant. Under the terms of the transaction, VMware is paying a special dividend of about $12 billion to shareholders, of which more than $9 billion is going to Dell on account of the latter company’s 81% stake.

The 2016 deal through which Dell bought EMC and, in the process VMware, for $67 billion was carried out together with investment firm Silver Lake. The Financial Times reported that Silver Lake has been left with stakes worth $11 billion in the two companies following the spinoff.

Dell’s shareholders, meanwhile, have received about 0.44 shares of VMware for each share of Dell they own.

Dell said that it plans to use its portion of the special dividend paid by VMware on occasion of the spinoff to help pay down its debt. The company borrowed around $70 billion to finance the 2016 purchase of EMC and still had about $32 billion outstanding at the end of July. Another key detail: VMware’s own $8 billion debt pile will no longer be part of Dell’s outstanding obligations.

Dell is emerging from the spinoff not only with a reduced debt pile but also a simplified capital structure. In April, when the spinoff was first detailed, Dell Chief Financial Officer Tom Sweet said that the move will make the companies eligible for key stock market indices such as the S&P 500. Dell is also hoping that its reduced debt pile will help it get more investment-grade ratings.

Though they’re now separate companies, Dell and VMware can be expected to continue working together as they pursue their respective growth strategies. Before the spinoff, they announce an agreement to “preserve the companies’ unique and differentiated approaches to the co-development of critical solutions and alignment on sales and marketing activities.” Moreover, Dell founder and Chief Executive Officer Michael Dell is the chairman of VMware’s board.

Dell’s growth plans following the spinoff place a big emphasis on edge computing. “Today, only 10% of data is processed outside of the datacenter, but it’s estimated by 2025, you’ve got 75% of enterprise data that will be processed outside of a traditional datacenter or a cloud,” Dell CEO Michael Dell said in a May interview on SiliconANGLE Media’s theCUBE. “You’ve got infrastructure all over the place, with edge being the fastest-growing. It’s going to be a huge acceleration of this whole process of digital transformation.”

Last month, Dell expanded its edge computing portfolio with the introduction of VxRail Satellite Nodes, edge computing systems that can be deployed at locations such as factories and stores. The offering was engineered together with VMware. The VxRail Satellite Nodes product series underscores how big of a role the companies’ partnership will continue to play in their respective roadmaps following the spinoff.

“What we’ve done is to formalize the commercial relationship into a series of agreements,” Dell said in the May interview. “We’ve driven a tremendous amount of innovation together, and that’s going to continue.”

Another core pillar of Dell’s growth plans is its Apex portfolio, which enables customers to purchase infrastructure and software on an as-a-service basis. Rivals such as Hewlett Packard Enterprise Co. are similarly adopting the as-a-service approach to drive revenue growth amid the growing popularity of the cloud.

As for VMware, the company said that it would continue to work with Dell’s financial services unit to help customers finance their digital transformation projects. Dell also plays a major role in VMware’s sales strategy. Dell channel sales accounted for about 35% of VMware’s revenues in the 2021 fiscal year.

Like its former parent company, VMware is doubling down on the as-a-service model and subscriptions as part of its growth plans. VMware’s subscription and software-as-a-service sales increased 23% year-over-year last quarter, growing at a rate more than twice as fast as the company’s overall revenue. 

Photo: SiliconANGLE