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Dell remains focused on a VMware merger, and now it's getting feedback from tracking stock holders

Alex Sherman

Dell has begun talking to holders of its VMware-tracking stock , DVMT, to gauge their interest on a merger with VMware , according to people familiar with the matter.

Dell remains bullish on VMware's future and wants to own as much of the stock as possible, and also wants to clean up the virtualization pioneer's capital structure, which has been complicated by a series of mergers and partial spin-outs, said the people, who asked not to be named because the discussions are private.

Dell Technologies released a filing Thursday saying it is still weighing an initial public offering, a merger with VMware or doing nothing.

Dell added a fourth possible option -- "a potential conversion of shares of Class V Common Stock of Dell into shares of DHI Common Stock of Dell." In other words, Dell is considering exchanging its common stock, which today is privately held by Michael Dell and private equity firm Silver Lake, for shares of the publicly traded tracker, DVMT.

To that end, Dell wants to suss out the thoughts of the DVMT tracker holders, which include hedge funds D.E. Shaw and Elliott Management, before it moves forward with any transaction, the people said. Dell wants to know whether these owners would prefer to hold complete shares of Dell, rather than shares of a stock that tracks only the performance of VMware within Dell. A DHI common share is an ownership stake in all of Dell, including EMC, the personal computer business, and Dell's ownership position in VMware.

VMware has a complicated ownership structure.

Currently, Dell owns 82 percent of VMware. Of that portion, 50 percent is held by owners of the tracking stock DVMT. The other 32 percent is held by founder Michael Dell and private-equity firm Silver Lake, the owners of Dell's DHI. Michael Dell and Silver Lake took Dell Technologies private in 2013 and later acquired EMC (which owned a big stake in VMware) in 2016. That $67 billion deal still stands as the largest pure technology acquisition ever.

The remainder of VMware is traded publicly as VMW. Last month, activist investor Carl Icahn acquired a stake in VMware below the mandatory 5 percent threshold for disclosure, according to people familiar. Icahn attempted to thwart Michael Dell's 2013 effort to take Dell private.

Dell is unlikely to pursue an exchange of DHI for DVMT if the holders of the tracking stock don't want to move forward with a VMware deal, one of the people said. Dell loves the VMware business and wants to own the entire company, the people said.

A reverse merger where combined Dell-VMware shares trade publicly would also allow Silver Lake to monetize its investment of Dell on the public market.

A deal that eliminates the tracker stock could simplify a VMware merger, as Dell could then negotiate a straight 1-for-1 exchange ratio with VMware holders. Dell doesn't need to legally give VMware holders a so-called "majority of the minority" vote on a deal, although it would prefer to include one, two of the people said. While VMware has a special committee working on its behalf to ensure a fair transaction, a majority of the minority vote is a "nice-to-have, but not a must-have," one of the people said.

Dell continues to work on a complex valuation process, where it must calculate a fair value for itself and the relative exchange values for the tracker stock and VMware shares. The complex nature of the deal will be a time-consuming process, and no announcement is close, said the people.

A Dell spokesman declined to comment.