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VMware Backs Out of Virtustream Joint Venture Deal With EMC

By Jeffrey Burt (Send Email)
Posted December 14, 2015

VMware is pulling out of a plan with parent company EMC to create a joint venture that was becoming one of a number of challenges in Dell's $67 billion bid to buy the giant storage technology vendor.

In a brief filing with the Securities and Exchange Commission (SEC) Dec. 14, VMware officials said they no longer will participate in the creation of a cloud services business called Virtustream with EMC, a plan that was first announced a week after executives with Dell and EMC announced the larger acquisition proposal.

VMware's share price already took a hit when the Dell bid was announced, and slid even further after EMC and VMware announced the Virtustream plan Oct. 20. EMC in May spent $1.2 billion to buy Virtustream, a six-year-old company known for its hybrid cloud management software. The initial plan called for EMC and VMware to split their stakes in the new company—which would carry the Virtustream name—50-50, though VMware investors worried that the plan would become an even larger drag on the virtualization company's stock.

A month later, reports surfaced that EMC and VMware officials were looking to revamp the Virtustream proposal to make it more palatable for VMware investors, with EMC taking a majority stake in Virtustream and assuming its losses, which would give VMware more protection. VMware officials have said that Virtustream's losses for 2016 could be as high as $300 million.

Now VMware, which has seen its stock price fall by more than 20 percent since the Dell deal was announced, is pulling out of the Virtustream plan altogether.

At the time the Virtustream plan was announced, EMC CEO Joe Tucci said in a statement: "We are addressing the changes in buying patterns and IT cloud operation models that we are seeing in the market. Our customers consistently tell us that they are focused on their IT transformations and journeys to the hybrid cloud. The EMC Federation is now positioned as a complete provider of hybrid cloud offerings."

Under Tucci, EMC has adopted a federated model for running its businesses, which essentially lets its various companies—including VMware, VCE, Pivotal, RSA and Virtustream—run as independent businesses that answer to the overarching EMC organization. EMC owns 80 percent of VMware.

The drop in VMware's stock has not only helped put an end to the Virtustream joint venture plan, but also has complicated Dell's plans to buy EMC and its federated companies. Dell's plan is to include the use of a "tracking stock" that would be traded publicly and mirror the price of VMware's stock, a move that is designed to help Dell and Silver Lake Partners finance the acquisition of EMC, which would be the largest in tech history. A fall in the share price of VMware would also cause the price of the tracking stock to fall.

Some reports have said that it could drive up Dell's tax bill for the deal to as high as $9 billion. Silver Lake is the investor that helped CEO Michael Dell buy out this namesake company in 2013 for $25 billion and take it private.

Dell reportedly is looking to sell some assets—including its SonicWall network security unit and Quest IT management business—to help drive down the $49.5 billion debt the company expects to incur when it buys EMC. The deal is expected to close sometime between May and October 2016. EMC shareholders have yet to vote on the deal.

The $67 billion proposal continues to move forward. EMC officials announced Dec. 12 that the 60-day "go shop" period—which gave the data storage giant two months to field offers from other potential buyers—expired without a real challenge to Dell's bid.


Originally published on eWeek.
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