Dell Stock Soars on Report It Is Weighing Spinoff of VMware Stake

Dell Technologiesshares soared in late trading afterThe Wall Street Journal reportedthat the company has hired advisors to consider options for the company's 81% stake in the enterprise-software companyVMware.

A transaction would be intended to address the valuation disparity between Dell (ticker: DELL) and its large VMware (VMW) holding. Dell closed Tuesday's regular session with an equity-market valuation of about $36 billion; its VMware stake at the close was worth about $50.6 billion.

Dell has about $48.3 billion in long-term debt, much of it dating back to the company's $67 billion acquisition of EMC in 2016. Dell also holds an 86% stake inSecureWorks(SCWX), a position worth about $810 million.

The Journal reports that the company could choose to spin off the stake, or instead to buy the VMware shares it doesn't already own. The latter option seems unlikely given the company's already leveraged balance sheet.

Under current tax law, the Journal noted, Dell can't spin off the VMware stake on a tax -free basis until September 2021, the fifth anniversary of the closing of the EMC deal.

Both Dell and VMware declined to comment.

n a research note last week, Evercore ISI analyst Amit Daryanani said that a sum-of-the-parts calculation for Dell suggests the company could be worth as much as $80 a share "using a fairly conservative set of assumptions surrounding the valuations of individual business units."

The analyst says there are a few reasons for the large discount to the value of the underlying assets. On the list are Dell's highly leveraged balance sheet, the fact that more than half of the stock is controlled by founder Michael Dell and the investment firm Silver Lake, and a corporate governance structure that provides limited voting rights for minority shareholders.

To get to a valuation of $80, Daryanani uses estimated fiscal 2022 estimates, and finds valuations of $46.4 billion for the Client Solutions Group (basically PCs), $14.9 billion for servers and networking, and $16.2 billion for storage, in addition to the VMware and SecureWorks stakes. He puts the total value at $60.4 billion.

In late trading, Dell shares had spiked 18.6%, to $58.14. VMware shares jumped 9.1%, to $162.73.

Questions:

1) How much is the value of Dell's holding in VM Ware?

2) What is value of Dell as a corporation? (Use market value of equity and book value of debt if you cannot find market value of debt).

3) Based on your estimate in (1) and (2) what is the value of Dell as a stand alone business (not counting its holding of VM Ware)?

4) What are some of the reasons for this low valuation for Dell as a stand alone company?