Michael Dell is working on the details of a reverse-merger with VMware, and here's what it will probably look like

Key Points
  • An announcement on Dell's strategic options is likely more than a month away.
  • Dell is considering a transaction that will roll up Dell, VMware and Dell's publicly-traded tracking stock.
  • An IPO is seen as less likely than a Dell reverse merger with VMware.
Dell Technologies' founder and CEO Michael Dell
Drew Angerer | Getty Images

Michael Dell and his advisers are beginning to focus on the details of a reverse merger with VMware to take Dell Technologies back into the public market, though any final decision or deal is more than a month away, said people familiar with the matter.

Dell and VMware are considering an equity exchange, which may or may not include some cash, that would give Dell access to all of VMware's cash flow by merging the companies together as a new publicly traded entity.

A combined Dell-VMware would also acquire the Dell tracking stock (ticker: DVMT) at a premium, the people said, who asked not to be named because the discussions are private. That transaction would probably also be completed as a stock swap, exchanging the new company's shares for the tracker, said the people.

Michael Dell is considering a deal now in part because his server business is growing and the PC business is stable, one of the people said. Dell acquired EMC for $67 billion in the largest pure technology deal ever in 2015 and has subsequently reduced total consolidated debt by about $10 billion.

As a result, Michael Dell may get a fair valuation of the closely held business at a particularly high price now, allowing him to maintain more control over a combined Dell-VMware.

Dell and VMware both made public statements last month noting Dell's evaluation of potential "business opportunities," including an initial public offering and a merger. Dell may also decide to maintain the status quo.

A Dell IPO isn't being considered as strongly as the reverse merger because it doesn't simplify Dell's capital structure, two of the people said.

Dell already owns about 80 percent of VMware. While VMware, which makes virtualization software, doesn't have to allow a public shareholder vote on the deal, the board of directors will consider adding a so-called "majority of the minority" vote to determine fairness, one of the people said.

CNBC reported in January Dell was considering a reverse merger with VMware, which would also allow private equity fund Silver Lake, a co-investor with Michael Dell, the ability to monetize its investment by selling shares on the public market.

New U.S. tax laws will also force Dell to deduct only 30 percent of the interest it pays on its $52.5 billion of debt. Dell paid $2 billion last year in interest payments, which it has been able to deduct from its taxes.

Dell declined to comment.

Why Dell-VMware reverse-merger would be a 'horror show': GBH Insights chief strategist
Why Dell-VMware reverse-merger would be a 'horror show': GBH Insights chief strategist