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Pivotal's IPO highlights concerns about Dell's debt resolution

Pivotal Software’s intention to go public once again draws attention to Dell Technologies’ ongoing efforts to pay down the mountain of debt incurred with its whopping $67 billion acquisition of EMC in October 2015.

Dell has attacked this problem from a number of angles, mainly the sale of software and services that it feels aren’t core pieces to accomplishing its longer term goals, including its software and services units.

Now it appears Dell wants to try the IPO route to raise additional cash. Pivotal reported just $509 million in revenues in its last fiscal year, and an IPO is unlikely to dent Dell’s debt of $50 billion. Still, a Pivotal IPO might raise enough to appease Silver Lake Partners, the private equity firm that specializes in leveraged buyouts among technology firms, which aided Dell in going private.

A somewhat unexpected problem makes it even harder for Dell to raise more cash. The tax reform legislation passed in late January 2018, aimed to protect ailing industries rather than high-growth ones like technology, reduces the cap on how much interest on debt a company can write off. That could force Dell to rethink its financial strategy.

“When they took on this debt they built a financial plan assuming they would be able to write off an X amount of the interest,” one long-time analyst told me. “It’s like the strike zone got changed in the middle of a game and now they have to adjust their swing.”

Dell’s ongoing financial woes have put back on the table the idea of a “reverse acquisition” in which VMware, a public company, would purchase the much larger and privately-held Dell-EMC. Fully integrating Dell-EMC into an already public company would inspire large institutional investors to pour money into VMware stock, and finally put a significant dent in Dell’s debt – or so the company believes.

Even if a reverse merger happens and attracts new investors, Dell may have to do more. Some might be encouraged by VMware’s new directions more modern products and technologies such as NSX, containers and open source. Dell, however, may require a significant acquisition with a very hot cloud-based company that’s in the thick of reshaping corporate level computing. For a legacy hardware company like Dell-EMC – and one already saddled with debt — that is way easier said than done.

Buying or merging with another large legacy hardware-focused vendor won’t resolve Dell’s situation. You can probably count on one or two fingers the number of successful mergers involving large server hardware companies. Anyone remember Compaq buying Digital Equipment Corp. or HP buying Compaq?

What Dell will decide and how soon is anyone’s guess. Regardless, Dell must take some big steps to get out of the corner it’s painted itself into.