The ISG and Client solutions revenue has too many strong competitors:
In PCs: Apple, Lenovo, HP, etc
In networking: Arista, Cisco, Juniper
In servers: IBM, HP
In storage: PSTG, NTAP, HP, IBM, startups
When such things go into decline, it won't be smooth. I mean the decline may start slow initially and then fall off faster. Because of the leverage, the equity will go down even faster.
But with VMW, there are no such worries, it is a pure software business where they have a monopoly.
I don't have much conviction in the ex-VMW business, it may or may not decline, but why take the chance?
Said another way, I wouldn't be surprised if Dell's ex-VMW revenue is halved in 10 years, while VMW's revenue triples over the same time.
Their "Client" revenue is larger than ISG and the moat is even narrower. If they were category leaders in any of those areas, I would feel better. Investing in categories where they are not the leader makes me sleepless.
Dell's EV = 71B, VMW stake =$41B. Over the long run, I don't feel safe paying 30B for the ex-VMW business.
That would be an implied -7% CAGR on CSG and ISG. Possible. I can't see 10 yrs. out. But it would be weird given positive growth in both segments since EMC close plus consolidating industries. It would be even weirder if that resulted in a similar cash flow decline.
And as an equity investor you are not paying for the $30b ex-vmw business... you are being paid $12bn. $46bn market cap of public subs - $34bn mkt cap DELL.
Dell has net debt of $38 billion. Dell is a narrow-moat hardware business (servers, storage, switches) competing with heavyweights like Cisco, IBM, HP.
VMW is a software monopoly with very wide moat and profit margins.
Applying Buffett's test: even if the stock market were to close down for years, I would be happy owning VMW, but unhappy owning Dell. I expect Dell's ex-VMW revenues to decline over time because competition is so strong.
They grew EBITDA ex-stock based comp about 12% on a TTM basis over the past year despite a pretty poor ISG print in the last quarter and depending on how you want to measure it, reported a couple billion in FCFE on an implied market capitalization of -$12Bn. Every dollar they earn and use to delever increases your ownership of VMW relative to the creditors. Plus, at DELL level, you're aligned w/ MSD himself. That matters.