Multinational technology giant Dell will spin off virtualisation company VMware in a move that will create two standalone public companies and generate up to $9.7bn for paying down debt.

The two companies positioned the split as providing greater strategic flexibility and simplifying capital structures.

The transaction is expected to close in the fourth quarter of 2021, subject to regulatory approval, with an $11.5bn to $12bn cash dividend for all VMware stockholders. Dell’s 81% holding means it will receive most of this money. VMware will need to borrow to make the payout, so the deal will see debt shift from Dell to the virtualisation giant.

Michael Dell will remain chief executive of Dell and chairman of the VMware board. VMware already has its own corporate structure and it will keep Zane Rowe as interim CEO of the company.

The two companies plan to continue a strategic relationship post-split, including aligned sales and marketing operations and working together on some products. The deal includes a five year pact under which the two companies to operate much as they do today, which will automatically extend annually once it ends unless this is vetoed by one or both firms.

“By spinning off VMware, we expect to drive additional growth opportunities for Dell Technologies as well as VMware, and unlock significant value for stakeholders,” said Michael Dell, chairman and chief executive officer of Dell Technologies in a statement. “Both companies will remain important partners, providing Dell Technologies with a differentiated advantage in how we bring solutions to customers.

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By GlobalData

“At the same time, Dell Technologies will continue to modernize its core infrastructure and PC businesses and embrace new opportunities through an open ecosystem to grow in hybrid and private cloud, edge and telecom.”

In 2016 Dell merged with VMware parent company EMC in a $67bn deal responsible for most of the debt on Dell’s balance sheet.

Founded in 1998, VMware creates software that virtualises different types of hardware and splits these elements into multiple virtual computers. Its customers hail from diverse sectors including banking, telecommunications, retail and transportation.

The spin-off has been on the cards since July 2020, when Dell filed documents with the Securities and Exchange Commission. In 2018 it also considered a full merger with VMware. The deal is expected to close in Q4 this year.

Dell is also seeking to qualify the demerger as a tax-free transaction with the IRS.

According to GlobalData’s market intelligence, VMware has made 22 acquisitions since 2016.