 From theCUBE Studios in Palo Alto in Boston, connecting with thought leaders all around the world, this is a CUBE Conversation. Hello everyone, welcome to this special CUBE Conversation. I'm John Furrier, joined Dave Vellante for a special report and analysis on the Dell Technologies VMware spinout, transaction, contemplation, story, circling, rumors. Thanks for joining, Dave, great to see you. Yesterday we filmed the Zoom. I was at home, you were in the office. We had to get the story out for the hot take on the news that Dell Technologies is spinning out VMware. We had a lot of hot takes. You got some amendments to make, but one of the things that came out of that was that we, after we had the interview, we said, look, let's just go get some more data. So I went out off on my own, you went off on your own to get some dig ins to get some data and get some reporting on this, investigate this further. Here's what I've found. I've heard a rumor and have confirmed from a great source that Michael Dell isn't selling. So the story's off, which would mean our half our analysis is off, but I also got some data that points to some other things that we said are consistent. So one, I want to get your thoughts. The rumor that I'm hearing is that Dell is not selling from my sources. What are you hearing? Yeah, I think there's a different take here, John. I mean, everybody assumed when the press release came out in the 13D that Dell was spinning off, it's stake if people inferred from that that they were selling. I think in fact, this is not a sale. I think everybody was wrong about that. I think in fact what Dell is going to do is distribute its stake, its 81% stake to shareholders. And so to Dell shareholders, and of course what's going to happen is Michael Dell owns a very large portion of Dell technologies. I think by recollection, I think it's over 60%. And as a result, he's the largest shareholder of Dell and that 81% is going to get distributed to the Dell shareholders. So he's going to end up with more than half of the ownership of VMware all said and done. So Michael Dell is I think ultimately going to have more than half of the ownership of Dell technologies. I think it's 60, 65%, probably 63, 65%, somewhere in there by my recollection. And he's going to end up with more than 51% of VMware, John. And so you're going to have, I mean, it would make sense, wouldn't it, that the majority shareholder is going to be chairman of both companies? And so you've talked about people on this, is that right? So just to get some background, where did you get that? Yeah, I think some people on Wall Street have figured this out, but it's definitely not hit the mainstream news. I think, you know, if you read the news, you read like the register, you read, I mean, essentially we made the same inference that Dell was becoming untethered to VMware. I, I, I'm not happening at all. I don't think that's happening at all. I also, I've talked to a number of customers, John, about this, asking them what they thought about the news yesterday. And there was a big shrug. I mean, I talked to one customer said, hey, you know, in the old days, I bought, I bought Block from EMC. I bought File from NetApp. They both made great products. They both were VMware friendly. This doesn't affect me one bit. And other customers I talked to said, yeah, I don't really see any, any big change here. I don't think anything's going to change. I think if Michael Dell is the chairman of both companies, I don't think anything changes. All right, so to correct what we had, what we had our hot take, which was, oh, untethering, spinning out VMware, implying that there's going to be an untethering or VMware can make it on their own, which I think, I think our analysis was right on the value of VMware. So, I mean, I stand by that report, no problem. It's the specifics of Dell technologies appearing as if they're unloading it. Okay, so that's the nuance here. So the nuance is Michael Dell actually is going to maintain, stay in control. He's not going anywhere. That's what you're just saying. Is that true? Yeah, picture the block diagrams. You've got Dell over here, and inside of Dell you have 81% ownership of VMware, and over here you have VMware. But essentially what Dell is doing is saying, okay, all you Dell shareholders, we're going to allow you to now directly own those VMware shares. And so they're going to transfer essentially from owning Dell to owning VMware directly. Of course, Michael Dell now is going to own VMware directly as opposed to owning it through his ownership of Dell. As a result, it cleans up the hair on this conglomerate structure, which means it's unlocked, and you've seen it in the stock market today, in the last month, it's unlocking value for Dell. It's unlocking value for VMware. John, on June 22nd, prior to the Wall Street Journal breaking that they were contemplating this, Dell's core value, in other words, the value net of VMware was around negative 23 billion. Today it's negative four billion. So they've already compressed about $20 billion out of that negative value. And that's the arbitrage play now. And it just goes up here. The second thing is a lot of investors that I talked to won't touch VMware stock because it's controlled by Dell. This liquidity hangover that I always talk about, I think this is going to bring other investors in from the sideline. So that is everybody inferred that Dell was becoming untethered. Dell becomes a lot less interesting without VMware. That's wrong. Nothing really changes in terms of the commercial relationship between these two companies and the impact on customers. So essentially, if I oversimplify it from my simple brain here, Dell is IPOing shares of VMware to the shareholders of Dell. What a benefit that is. Yeah, I mean, again, they're just- I mean, it's not an IPO in the sense of an IPO. It's basically saying, hey, shareholders of Dell, good job, you want the value of VMware, go take it. So you remember how this all came about? I mean, remember when Dell bought VMware, they had a gap between the amount of cash they could raise, the amount of debt they took on, the amount of cash that Michael Dell and Silver Lake and a couple other partners threw in. It was only about $4 billion to get $67 billion. And the way they covered that gap was they created a tracking stock called DVMT. And DVMT was supposed to track VMware value. It really didn't. And so what happened was, DVMT was a public company. Dell wanted to go public again and said, okay, we're going to do this through the DVMT vehicle and we're going to issue shares of Dell. And you remember Carl Icon and Elliot, they were very active and they sort of got Michael in a headlock and said, we need more if you're going to do that. And they did. Ultimately, Dell goes public, but then they faced this liquidity hangover. And so also you might recall that Dell floated Pivotal and monetized that to D-Levver. They paid down some debt. And then basically went to VMware and said, okay, you're going to buy Pivotal back. They used some cash and they issued shares. So the Dell's ownership of VMware escalated to 81% at the time. That's how they got to 81%. I remember thinking, wow, how much of this company are they going to own? Well, this is what it allowed them to do. It now allows them to distribute the shares and allows Michael Dell personally to have the majority ownership of VMware. And it's absolute genius. And it cleans up the structure of the organization. So instead of having to own VMware through Dell, which by the way, I've always said, it's a cheap way to own VMware. A good move if you bought Dell, stock to own VMware. Now you own VMware directly. And of course, Michael Dell owns it directly. Absolute genius move over the last three, four, five years. Yeah, and one of the things we did say in our hot take yesterday was that that negative value of Dell technology world, Dell technologies gets shrunk and also can create value. Here they're even getting more value into ownership of VMware. So I got to, but I got to ask you, you mentioned a comment about this liquidity hangover and they have this dividend. Could you explain that? Because I just not following this liquidity problem. Well, this is very interesting. So Dell, because it has so much debt, number one, number two, because it has controlling share ownership of VMware and it has 90 plus percent voting power. Shareholders penalize Dell. And so the big thing here is the debt. What essentially Dell is doing it, people always joke that VMware is Dell's piggy bank. That's true. And here it comes again. We saw that with Pivotal, we saw that with DVMT. What I think is happening, John, is Dell is going to essentially transfer some of its debt to VMware. So it's going to have VMware take on a little bit more debt. It has said that they want to maintain investment grade ratings for VMware, which currently has great ratings. Dell does not have investment grade rating. It needs to pay down more debt. So essentially it's going to shift some of that debt to VMware through a special dividend of which Dell will be a great beneficiary and will allow Dell to pay down some of that debt so that it can come investment grade. And they want to take on an amount of debt that will not crush VMware's balance sheet so that it will also be investment grade. So they're creating this equilibrium, if you will. Now, I've heard the ceiling on VMware's debt in order to get to equilibrium or in order to maintain investment grade is no more than five billion. But I've also heard much, much higher numbers, as high as eight to 10 to maybe even 12 billion. I don't know if VMware can take on that much debt and maintain investment grade. The point is there's some number there which Dell is going to force VMware to take on that debt. Now, one last thing I'll say is, despite Michael Dell's technology's ownership and control 90 plus percent control, it has a fiduciary responsibility to shareholders. But my view is it's meeting that responsibility because the value, it's unlocking value. So who can complain? It's again, it's absolutely fascinating and brilliant. But that's what that dividend is all about is Dell saying, okay, VMware, you're going to take on more debt and you're going to help us pay down the Dell debt and you're going to take on more where both be investment grade. And they both get value and increase. Yeah. So it's a financial engineering deal. Michael Dell still can run both companies. Do you still think he will be running both companies? Yeah, I think there's no question that Michael Dell will be the chairman of Dell. He is the chairman of Dell Technologies, chairman of VMware, and he's going to continue to be. And so this commercial agreement that they're going to assign is a wired deal with VMware and Dell. And by the way, there is every incentive for VMware to do this. People may say, hey, they're strong, I mean Dell, but VMware, Dell is a huge distribution channel for VMware. And I'll tell you something that Dell has done that better than EMC and Joe Tucci ever did. And you know, we're big fans of Joe Tucci, but Dell has unlocked a channel for VMware the way EMC never did. VMware through Dell has seen incredible growth and really as Dell as I would say VMware's most important partner, biggest partner because Dell didn't apologize for super gluing itself and VMware to it. Whereas EMC was always much more cautious trying to play the ecosystem game. Well, they were saving their storage business with VMware. I mean, VMware saved EMC, some would say. Yeah, I would say. I mean, if it weren't for the acquisition of VMware back for $650 million in the early 2000s, you know, the EMC would have been a really uninteresting company over its last five to seven years. So they milked that storage drive, but then they had that uplift with VMware. Michael says, hey, I'll put this right in the family. And this is what it is. It's a deal where it's in the Dell family portfolio. And what Michael's doing is to your point and what you're saying is he's unlocking all this value for both Dell and VMware and saying, okay, let's go to market and figure it out. I got to tell you this, John. I mean, as a founder, the co-founder, you know, obviously we're a little smaller than Dell, but you got to appreciate what Michael Dell has done here. He went through hell taking his company private. You know, took on Carl Icon. I said yesterday, who beats the great icon? Well, Michael Dell beat the great icon. You know, who outmaneuvered Elliot? I mean, Elliot is a very influential player in the market. Michael Dell said, you know what? I'm not going through that again. I have control of Dell technologies. I have voting control over VMware. I'm going to do what's right for me, for my company and my shareholders. And look, Michael Dell's making his shareholders money. I mean, who can complain about? I'll tell you, I mean, I'll tell you there's two playbooks I look at, Andy Jassy and Michael Dell. I mean, Michael Dell knows how to make money, right? He's always been a great money maker. He's also a geek. He loves to get down and dirty in the tech. He's got two 49 inch Dell monitors. Obviously it's his company. He gets the best gear. All kidding aside, you know, he built a company, went public, took it private. That was a reset. I mean, in his stage of his life, it was his reset. This is his swan song. He's having a ball and he's financially engineered this success with the power that he built. And it's a whole nother level, whole nother chapter in his life. And he's a money maker. He knows how to make money. You put Silver Lake and Michael Dell together. You put Michael Dell with these kinds of brains, with his asset base, as you say, the cash flow of Dell, with the asset of, say, a crown jewel like VMware that literally can pave the path to the future. He could ride on the cloud back all day long. He doesn't need a public cloud for anything. Yeah, well, so before we talk about that, I just want to double down on what you said. People just always say, yeah, Michael Dell, you know, he's a finance guy. It's not true. Yes, he's got a, well, he's got a finance team that is amazing and no doubt Michael is instrumental there, but he's a business genius. I mean, he really had business visionary. Yeah, that guy built his own PCs in college. So he's obviously, like you said, he's a geek, technically, extremely savvy. He's a visionary. He's one of the top, I don't know, 10 visionaries in the computer industry, I would say history. So now you're absolutely right. Well, you say it doesn't need a cloud. I think my concern about this whole deal yesterday when I misunderstood that this was spinning off and becoming untethered is what about the edge? What about multi-cloud? You know, what's a Dell's play there? Well, Dell's play is still VMware. Their strategy hasn't changed one bit. I mean, nothing changes. The only change is the direct ownership of VMware stock which unlocks value. Nothing else changes. Let me tell you to wrap my piece up here and then we can wrap it up. Just in interface with Michael over the years and knowing him personally, seeing him up close, here's how I think his mind works. You mentioned he assembled PCs in college, okay? He built out, he pioneered putting suppliers in supply chain, getting prices lower, direct mail. He pioneered that direct to consumer. All these successes. This whole world that's in there is like assembling a PC in his dorm room, except he's got it with billions of dollars. You know, little VMware here, processor, I.O. I mean, he's essentially a financial geek at this point. I mean, oh, he likes to look in and he loves Pivotal. He loves some of the things he's doing with VMware. He likes to look under the covers and see the engine. But he's a financial assembler now. So he's looking at this and you can see how it's all working and to your scoop here. Yeah, I guess it looks like a spin out if that's what people want to call it and the press jump on that. But if it pieces, it takes the hair off the deal. That's basically makes the I.O. move better. He's got a, you know, good bus there, 32 bits. Again, assembling a PC, assembling companies and creating value. He makes money. I love it. It's a great analogy. The piece parts are a little bit more valuable, but I just want to clarify what I said. The other thing that changes is the income statement. Dell will no longer recognize VMware revenue. And so that changes. And of course, the balance sheet changes. That's a huge change. Now, I guess the caveat is this in theory couldn't happen, but it just makes so much sense. I was kind of sniffing around it in my breaking analysis when this thing first leaked. And I said in that, John, if the financial geniuses at Dell can figure out some way to monetize this, well, here it is. It now is becoming much, much more clear. And I'm impressed. Well, Dave, he was assembling PCs in college. Now he's assembling companies. What did we do in college? Don't even go there. Dave. Let's end it there. We'll end it right there. Dave, great, great scoop. Top story. Michael Dell is not selling VMware. It's transaction. It's going to have all that value. And it's unlocking more Dell tech value. Look for the shares. We distribute it to the Dell technology shareholders. And it's the same game, super gluing together, creating value for both. Dave, great scoop. Thanks for joining me. Thank you, John. Thanks for having me. Keep special report and analysis here in studio in California, Dave Vellante in Massachusetts. I'm John Furrier. Thanks for watching.