Dell leaps 17% after confirming it could spin off software firm VMware, Bank of America raises price target

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Dell leaps 17% after confirming it could spin off software firm VMware, Bank of America raises price target
Actress, Writer and Director, Aisha Tyler, and President of CLient Solutions Group at Dell Sam Burd help Dell kick off CES 2020 at their #DellExperience Live press conference, giving the world a glimpse of what the future holds for PC innovation on January 07, 2020 in Las Vegas, Nevada.Jerod Harris/Getty Images for Dell
  • Dell shares shot as much as 17% higher on Thursday after the company confirmed it was mulling a spin-off of its $50 billion stake in the software firm VMware.
  • Such a transaction wouldn't take place before September 2021, and the two companies would seek to maintain their "strategic relationship," Dell said in a press release.
  • Bank of America raised its price target for Dell to $70 per share from $60 following the release.
  • A spin-off "could help unlock the value of core-Dell" and allow VMware to pursue faster growth, the bank's analysts said.
  • Watch Dell trade live here.

Dell stock surged as much as 17% on Thursday after the company confirmed it was mulling a spin-off of the cloud-computing firm VMware.

The tech giant holds an 80.6% stake in VMware, worth roughly $50 billion. Spin-off talks are in an early stage, Dell said in a press release on Wednesday. The Wall Street Journal first reported on the considerations in late June.

Dell said that a spin-off would not take place before September 2021 and that it would aim to maintain a partnership with VMware.

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"The strategic relationship between Dell Technologies and VMware has never been stronger," CEO Michael Dell said in the release, adding, "Regardless of the options we are exploring to create additional value, we are accelerating our strategy — which remains unchanged."

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VMware traded as much as 4.4% higher on the news.

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Dell's confirmation has already earned some praise on Wall Street. Bank of America on Thursday raised its price target on the company's shares to $70 from $60, implying a 33% jump from Wednesday's close. Analysts led by Wamsi Mohan maintained a "buy" rating for the stock, describing a spin-off as a "net favorable event" for both VMware and Dell shareholders.

"We think such a transaction, if it were to go through, could help unlock the value of core-Dell, which continues to trade at a low multiple, while as a separate company VMware would be able to pursue its own strategy for growth," the analysts said.

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Bank of America also sees such a transaction yielding a special dividend from VMware. The software firm has strong enough cash flow and could issue new debt in the event of a spin-off. Dell could then use cash from the dividend to pay off some debts and bring itself closer to an investment-grade rating, the analysts said.

Dell shareholders could even leave the spin-off with holdings of both Dell and VMware on a pro rata basis, Bank of America added.

Dell traded at $60.10 per share as of 10:58 a.m. ET, up 19% year-to-date.

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