Privately-held Dell announced Thursday its plan to spin-off VMware into a separate business, a move expected after recent company statements on shaking up its broader corporate structure.
Dell said it plans to offer VMware shareholders a special dividend worth between $11.5 and $12 billion. The company, a maker of computer equipment and technology services provider, said the sale of new shares of the division should help it generate capital to pay down some of its debt.
Dell, which acquired VMware through a $58 billion EMC acquisition deal in 2015, owns around 81% of the company's shares. Dell is expected to gain between $9.3 billion and $9.7 billion from the transaction.
"By spinning off VMware, we expect to drive additional growth opportunities for Dell Technologies as well as VMware and unlock significant value for stakeholders. Both companies will remain important partners, with a differentiated advantage in how we bring solutions to customers," Dell's chief executive officer, Michael Dell, said in a statement announcing the move.
In its presentation to investors, Dell outlined a five-year agreement to revisit the transaction each year thereafter. Dell also plans to work closely with VMware by selling its products via its Dell sales team. VMware also agreed to continue working with Dell Financial Services.
VMware, an American cloud computing and virtualization technology company, said in a separate statement that it is looking forward to completing the transaction as it is expected to give up "increased freedom" to execute its strategy. The company said the deal will give it a more "simplified capital structure and governance model," while also maintaining its strategic partnership with Dell.
While it was technically under Dell and part of EMC, VMware had partially been operating as a separate entity. The company had its own executive team and board of directors and was also allowed to continue to sell its stock separately.
Dell shares surged by more than 8% after the announcement Thursday, while VMware's stock climbed by a modest 1.4%.
The transaction is expected to close at the end of the year pending regulatory approvals. Analysts said that Dell will have to gain a favorable ruling from the IRS. It needs to convince the IRS to qualify the deal as a tax-free spin-off.
