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Do The Math: Investor Pressure Behind Possible EMC Merger, Acquisition

The high valuation of EMC's stake in VMware in proportion to EMC's overall market capitalization and earnings suggests EMC has to explore all options.

EMC is exploring all options, including selling its VMware business, merging with a systems vendor or selling itself outright in response to pressure from investors looking to get more value from EMC, according to a financial analyst closely following the situation.

The Wall Street Journal and Barron's have both reported in the last couple days that EMC held discussions with Hewlett-Packard and Dell about the possibility of combining with one of them either as a merger of equals or by being purchased outright.

Neither EMC, HP or Dell responded to requests for more information from CRN.

[Related: EMC's Tucci Addresses Question Of Potential VMware Spinoff On Q2 Financial Call]

Joseph Wittine, a senior equity analyst at Independence, Ohio-based financial analyst firm Longbow Research, told CRN that there is investor pressure, particularly from short-term investors, for EMC to merge or be acquired.

Wittine said the pressure stems in part from the math related to EMC's valuation in the event that sells its VMware business, a company in which EMC holds an equity stake of about 80 percent.

Such a sale has been the subject of much speculation ever since the possibility was raised in July by Elliot Management, an activist investor who acquired a 2 percent stake in EMC, making it the fifth-largest investor in the company. EMC has since been pretty clear that it does not want to engage in such a deal.

Wittine said the math makes a pretty compelling argument for the possibility of EMC merging or being acquired even though he said there is little chance of that happening.

EMC has a market capitalization of about $61 billion, while VMware has a market capitalization of about $40 billion. With EMC's 80 percent stake in VMware, about $32 billion of EMC's total market capitalization is from VMware. Subtracting that $32 billion from $61 billion gives the core EMC business a valuation of about $29 billion, he said.

Applying that same math to estimated fiscal year 2015 earnings, in which VMware is expected to earn about $1.5 billion of EMC's total earnings of $4.4 billion, giving core EMC estimated earnings of about $2.9 billion, or less than 10 times earnings, compared to 14 times for rival NetApp, Wittine said.

"That's a big gap," he said. "A 50 percent multiple."

NEXT: EMC Has To Explore All Options


EMC has said it does not want to spin out VMware, while Elliot Management said EMC should do just that, Wittine said.

EMC, by just talking to companies like HP and Dell about a merger or acquisition, is showing how far it will go to not sell VMware, he said.

"I think EMC is saying, we'll do everything we can to not do this," he said. "It shows how ardently EMC wants to keep VMware under their umbrella that they'd sell off the whole company first."

Solution providers said EMC has no choice but to explore every alternative for bringing value to its shareholders.

Anything is possible, said Dan Serpico, president of San Francisco-based solution provider and long-time EMC partner FusionStorm.

"There is a lot of consolidation going on in this market," Serpico told CRN. "EMC is under pressure from shareholders."

Jamie Shepard, regional and health systems senior vice president at Dallas-based solution provider and long-time EMC partner Lumenate, told CRN reports that EMC is considering such a move is no surprise.

"Everyone looks at all the possibilities," Shepard said. "Everyone engages in talks about their future."

Published September 23, 2014

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