Plot Thickens As EMC Is Reportedly Considering Being Bought Out By VMware

Storage vendor EMC's board of directors, which has faced pressure from activist investor Elliott Management to spin off VMware, is now considering being acquired by its $6 billion virtualization and cloud subsidiary, Re/code reported Wednesday.

In an unusual scenario outlined by Re/code's sources -- known as a downstream merger -- VMware would issue $50 billion to $55 billion in new shares, and then use about $30 billion of that to buy out EMC's approximately 80 percent stake in VMware.

EMC shareholders would get the rest of the newly issued VMware shares, along with cash from some $10 billion in new debt, according to the Re/code report.

[Related: EMC May Decide To Buy Out VMware Instead Of Spinning It Off -- Report]

Sponsored post

VMware shares dropped more than 5 percent in the final hour of trading after the Re/code report, closing at $86.12. EMC shares rose more than 3 percent, to $26.85, in the wake of the report.

Spokespeople for EMC and VMware declined comment.

The report comes two days after Re/code reported that EMC was considering buying out the remaining 20 percent of VMware it doesn't own and absorbing the virtualization vendor, in part to cut operational costs.

While Elliott Management wasn't thrilled about that scenario, it would support VMware acquiring EMC, according to Re/code's latest report.

Elliott Management started pressuring EMC's board to spin off VMware last October. Jesse Cohn, Elliott Management's senior portfolio manager and head of U.S. equity activism, said in a letter to the board that EMC and VMware are now competing in the storage market to the detriment of EMC shareholders.

Elliott Management also wants EMC to break up its "federation" of subsidiaries, which includes VMware, Pivotal, RSA and EMC's Information Infrastructure unit. But EMC CEO Joe Tucci has steadfastly insisted that the EMC Federation is good for customers because it gives them a range of technology options.

One executive from a national solution provider that partners with EMC and VMware said any kind of merger between the two could result in a clash of cultures.

"Joe Tucci and EMC executives can talk all day long, but to execute in the field is going to be a massive endeavor," said the executive, who didn't want to be named.

On EMC's earnings call last month, Tucci said EMC and VMware operating individually in large global accounts amounts to "over $1 billion in revenue synergies." He said that figure could exceed $2 billion if EMC and VMware were to get "tighter aligned."

Tucci, 68, also said the Hopkinton, Mass.-based storage vendor's board is "actively engaged" in searching for his replacement. Yet Tucci has been talking about stepping down for more than three years, and has been working without a contract since February.

EMC and Elliott Management came to a truce in January after EMC appointed two Elliott-sanctioned members to its board, but that agreement expires at the end of September.