VMware-Dell Reverse Merger Report Sends VMware Market Cap Plummeting By Nearly $10 Billion

The possibility of Dell becoming a public company again via a reverse merger with its VMware subsidiary shook investors and left VMware partners questioning what impact the deal would have in the technology sales trenches.

VMware shares dropped $24.95 (17%) to $125.05 in trading on Monday after CNBC reported that VMware might actually buy the larger Dell to pave the way for Dell to go public without filing for an initial public offering.

The market capitalization of VMware – which Dell owns 80 percent of and participates in that investment through a tracking stock – stood at $50.90 billion on Monday, down from $60.47 billion at the close of business Friday.

[Related: Report: VMware Might Buy Dell In Reverse Merger]

Dell's board of directors is scheduled to meet later this month to discuss its options in the wake of new interest tax deduction limitations that went into effect with the passage of the Tax Cuts and Jobs Act by Congress last month.

That bill limits the tax deductibility of interest payments to 30 percent of a company's earnings before interest, taxes, depreciation, and amortization (EBITDA). That severely impacts the $50 billion in debt that Dell has on its balance sheet in the wake of its historic acquisition of storage market leader EMC for $67 billion in 2016.

Some partners are questioning what impact a reverse merger would have on VMware's ability to partner with Dell EMC rivals such as Hewlett Packard Enterprise, Cisco and NetApp.

"VMware now plays Switzerland to the rest of the industry," said John Woodall, vice president of engineering at Integrated Archive Systems, a Palo Alto, Calif.-based solution provider who works closely with Dell EMC as well as Cisco and NetApp. "If Dell said that VMware has to work with its own stack more closely, it doesn't matter whether Dell EMC buys VMware or VMware buys Dell EMC: the upside for Dell EMC is it gets full control of its destiny. It gets control of the orchestration and automation tools."

Another solution provider told CRN on condition of anonymity that it is difficult to see how a VMware acquisition of Dell would work for the channel given how closely VMware has teamed with Dell's rivals in the past.

"Many vendors talk to VMware first of all when it comes to their products to make sure they are ready to work with the VMware hypervisor," the solution provider said. "VMware's primary value to the market is that it has the best hypervisor. And the hypervisor's success is dependent on being independent. Now, what if VMware is firmly and unequivocally integrated into a hardware vendor?"

Dell EMC is already looking at how to use VMware as part of a larger assault on the storage market, Woodall said. "Dell EMC is going after Cisco's Hyperflex business," he said. "Irrespective of how it handles VMware, Dell EMC is more competitive in Cisco accounts. And Dell EMC with VMware will be even more competitive."