The surprising news that Intel had snatched away VMware CEO Pat Gelsinger to replace Bob Swan and fix the troubled chip giant is weighing heavily on shares of both VMware and Dell Technologies, which has an 80.6% stake in the company.
Last year, Dell (ticker: DELL) confirmed press reports that it was considering spinning off its VMware stake to current Dell holders. In such a transaction, VMware (VMW) would likely pay a large cash dividend back to Dell that the PC maker would then use to reduce its substantial debt load.
Now, with VMware losing its iconic leader, there are concerns on Wall Street about VMware’s valuation. Keep in mind that the value of Dell’s stake in VMware is almost equal to Dell’s entire market capitalization.
With a record that includes 30 years at Intel—he was the company’s first chief technology officer—Gelsinger’s name crops up whenever a big tech CEO slot opens. In 2013, for instance, Kara Swisher named Gelsinger as her “dark horse pick” to succeed Steve Ballmer as CEO at Microsoft (MSFT). And that same year, he denied rumors that he would succeed Paul Otellini as CEO of Intel. Of course, Microsoft chose Satya Nadella, while Intel picked Brian Krzanich, who was succeeded by now outgoing CEO Bob Swan.
Dell CEO Michael Dell said in a statement that he wished Gelsinger the best in his new role, and that he would remain on the VMware board.
”The VMware management team is strong and won’t miss a beat during the transition and naming of a new CEO,” Dell said.
Dell also said that on the potential spinoff of the VMware stake, nothing changes. “As both companies have stated, we believe a tax-free spin could drive shareholder, team member and customer value by simplifying capital structures and enabling flexibility,” he said. “Our strong partnership with VMware continues—working together to bring innovative solutions to customers. It is business as usual.”
But investors are not so sure.
Following the latest Intel appointment, William Blair analyst Jason Ader cut his rating on VMware shares to Market Perform from Outperform. He notes that the news follows the departures of two other key VMware executives. Rajiv Ramaswami, who had been chief operating officer of products and cloud services, last month was named CEO of Nutanix (NTIX). And Ajay Singh, who had been general manager of the company’s cloud management business unit, earlier this month was named chief product officer at Pure Storage (PSTG).
“While Gelsinger’s departure is a major loss for VMware—we view him as one of the best CEOs in the technology industry—our larger concern is a potential leadership vacuum forming at VMware that could hamper execution at a critical time (as VMware goes through a major transition in its business toward cloud, containers, and security),” Ader wrote. “While VMware has a deep management bench, including leaders like [interim CEO] Zane Rowe …the collective impact and timing of these departures signal to us that there may be trouble brewing beneath the surface at VMware.”
“Taken together with uncertainty on VMware’s future ownership structure and uninspiring [reseller] discussions in the fourth calendar quarter (more cautious mentions), we worry that these changes at the top could create material disruption in the VMware organization and business,” Ader added.
BMO Capital analyst Keith Bachman, who as an Outperform rating on VMware shares views this as a “big loss” for the company.
“Gelsinger does not get enough credit for playing a meaningful role in balancing the interests of VMware and Dell, which in our judgment is not an easy undertaking,” Bachman wrote. “Further, VMware is currently in a delicate position in its relationship with Dell, given the potential for a spin in September of this year …we are disappointed that Gelsinger has elected to leave, and we think this is a net negative for VMware shares. At this juncture, we are unclear who might take his place.”
In trading Wednesday, VMware shares were down 7.7%, to $131.85, and Dell was off 8.4%, to $70.28. Intel shares were up 7.6%, to $57.27.
Write to Eric J. Savitz at [email protected]
