Why Dell Is Reportedly Reconsidering Another IPO

NEWS ANALYSIS: Company officials are talking about going public through an IPO after hedge funds balk at a proposal to buy tracking stock tied to VMware, reports say.

Michael Dell

Michael Dell still plans to take his eponymous company public again. It’s just that now he might take the initial-public-offering route.

The CEO of Dell Technologies in July announced that he planned to take the company public by a complicated transaction process based on spending $21.7 billion to buy “tracking stock” from investors that is linked to VMware, a public company of which Dell Technologies owns about 81 percent. The idea was to use the maneuver to take Dell Technologies public without having to go through an IPO.

However, according to reports by the Wall Street Journal and Reuters this week, Michael Dell and other officials with the company are now considering an IPO after several hedge funds—including Elliott Management and Canyon Capital Advisors—and activist investor Carl Icahn pushed back at the tracking-stock idea. Tracking stocks is tied to the performance of a particular business unit or division—in this case, VMware—rather than the entire company as a whole.

Dell officials have declined to comment on the reports.

Grueling Process to Go Private in the First Place

Except for VMware, the rest of Dell Technologies is private, the result of a grueling months-long effort by Michael Dell in 2013 in which he and investment firm Silver Lake Partners spent more than $24 billion to buy the company and take it private. The company inherited VMware in 2016 when it bought EMC and all of its companies—including VMware, RSA, Virtustream and Pivotal—for more than $60 billion.

The deal created a massive $80 billion company, and Michael Dell has said it has become stronger since the deal, noting the broad portfolio of offerings ranging from PCs,  workstations and infrastructure that stretches from data centers to the edge and cloud to security software and virtualization.

However, the deal also brought Dell Technologies tens of billions of dollars in debt, and earlier this year Dell officials confirmed that they were looking at options for the future. Those options included a reverse acquisition with VMware buying Dell, keeping the status quo or going public.

Initially, they considered an IPO but reportedly feared that investors would turn away because of the company’s high debts. They eventually opted instead for the tracking-stock option.

Tracking-stock Plan: 'An Extraordinarily Fair Offer'

Michael Dell and other officials spoke earlier this month with financial analysts in New York to promote its tracking-stock plan, noting revenue growth and market share gains in many segments. At the same event, Chief Financial Officer Tom Sweet called the tracking-stock plan and its proposed $109 per stock price “an extraordinarily fair offer” given the growth of the company, according to a report by Bloomberg.

If holders of the tracking stock were to reject the proposal, Dell Technologies would return to the status quo and run as a private company, Sweet said. However, an IPO is again in play, according to reports.

Earlier this month, Dell officials reported that cash flow had grown by 45 percent while total debt fell to $50.3 billion, a big improvement over the $57.3 billion of debt accumulated right after the deal for EMC closed.

The acquisition of EMC created a sharp contrast in strategy to that of rival Hewlett Packard Enterprise, which was born when then-Hewlett-Packard split into two companies in 2015. HP officials at the time said they wanted to create two smaller, more nimble and agile companies that could focus more closely on their respective products and markets. HP Inc. makes PCs and printers, while HPE competes in the data center, cloud and edge computing arenas.

Dell officials saw an advantage in getting larger and having a broad array of technologies under the same umbrella, giving it the size and resources to address the myriad needs of customers.