EMC Files Muted Response To Activist Investor Push For EMC-VMware Split
Joseph F. Kovar
|Click to enlarge image. Courtesy Elliot Management|
EMC said Thursday it is considering ways to enhance shareholder value in response to an open letter from one of its top shareholders pushing EMC to sell its VMware stake and engage in merger or acquisition talks with other large IT vendors over the remainder of the company.
EMC responded in a statement that the company's board of directors "regularly reviews and rigorously evaluates" strategy to enhance shareholder value, and that its executives have met several times over the last few months with representatives of hedge fund manager Elliott Management.
"In the course of its business, EMC regularly hears from customers and partners, around the world, strong expressions of support for its strategy as well as ability to serve their evolving range of needs in a rapidly changing and complex IT marketplace increasingly being defined by cloud computing, predictive big data analytics and always-connected mobile devices," EMC said in the statement.
EMC declined comment beyond the statement.
The statement echoes EMC Chairman Joe Tucci's July response to financial analysts about news reports that Elliott Management had gathered a $1 billion equity stake in EMC and was calling for EMC to sell VMware.
Tucci at the time said during a conference call with analysts that Elliott Management had contacted EMC.
"For the record, and I deeply believe in this principle, we, and I mean 'we' as in management and our board of directors, are always open and welcome a dialogue with all of our shareholders," he said. "And we respectfully listen to their ideas and beliefs as we form our strategic direction and policies."
Later, during the question-and-answer period of that conference call, Tucci was asked about the positive and negative implications of a separation between EMC and VMware.
Tucci said as customers move to what EMC terms the "third platform" of IT -- which combines mobile computing, big data, the cloud and new ways to use social media -- EMC as a whole is the best way to support the transition even as customers continue to depend on existing IT infrastructures to manage current workloads.
"The whole game here is going to be, how are you going to support 'platform two' so they feel comfortable, and how do you transition them so you make their journey as seamless as possible to 'platform three?' " he said. "Without a doubt, we have some great assets. ... To me, splitting them up, spinning out one of your most strategic assets -- I don't know of any other tech company that has done that and been successful."
NEXT: Elliot Management Lays Out Its Case To Break The EMC Federation
|EMC Federation Chairman And CEO Joe Tucci|
In its Wednesday letter to EMC, Elliott Management, which said it has a 2.2 percent equity stake in EMC, laid out its case for breaking up the EMC Federation. The EMC Federation is made up of EMC Information Infrastructure, virtualization leader VMware, big data and custom apps developer Pivotal and security technology developer RSA.
EMC, however, is currently moving to get value from the EMC Federation. The company on Thursday officially unveiled the Federation Software-Defined Data Center, which combines EMC and VMware technology into a flexible platform upon which further EMC Federation technologies can be built.
Jesse Cohn, portfolio manager at Elliott Management and the signer of the letter, wrote that EMC, while a leader in storage, is heavily undervalued from a share price perspective. Elliott estimated that, in the 10 years since EMC closed its VMware acquisition, its share prices have underperformed by 14 percent compared to peers, by 43 percent compared to the NASDAQ Exchange and 18 percent when compared against the S&P 500 IT companies.
"EMC’s stock has materially underperformed its peers and the market since the VMware acquisition, despite that purchase bringing EMC over $32 billion of value (VMware has a $40 billion market cap and EMC owns 80 percent of it)," Cohn wrote.
Cohn also wrote that EMC and VMware are now competitors in the storage business as evidenced by statements from EMC executives, including Tucci, over the years despite EMC's insistence that the two are "better together." He wrote that VMware is now a provider of storage software and EMC, known primarily for its storage hardware, is pushing quickly into software-defined storage.
EMC and VMware also compete against each other over cloud infrastructure, Cohn wrote.
At the same time, EMC's ownership of VMware is negatively impacting a long-term relationship between EMC and Cisco. VMware and Cisco are fierce rivals in the nascent software-defined networking, or SDN market.
Cohn also noted VMware's success is due to relationships with multiple EMC rivals, but that ownership by EMC hinders those relationships. EMC, Cohn wrote, could easily ink reseller and technology agreements with an independent VMware.
Another major issue for EMC is Tucci's tenure as chairman of EMC, Cohn said, pointing out that EMC has several other CEO-level executives who coud expand the value of the company's different parts should they be independent.
NEXT: Elliott Management's Alternatives To The EMC Federation
Cohen cited EMC Information Infrastructure CEO David Goulden, VMware CEO Pat Gelsinger, Pivotal CEO Paul Maritz and RSA Executive Vice President and Executive Chairman Art Coviello.
"These men are well-respected, CEO and CEO-caliber executives who are paid like CEOs, who are industry leaders, who can leave to go elsewhere, and, yet, who still report to another CEO," he wrote.
Tucci, who is 67, is set to retire in February 2015. However, his retirement has already been delayed a couple of times, and there is no guarantee he will retire as planned.
Cohn suggested EMC spin off VMware in a tax-free fashion that would result in an upside of 48 percent to EMC shareholders. That sale would give EMC enough capital to do a 20 percent buyback of its own shares, leaving the company well-funded to pursue additional acquisitions, Cohn wrote.
As an alternative, EMC could split off VMware by giving EMC shareholders the option of purchasing VMware shares at an attractive exchange ration.
"Whatever the mechanism used for a separation, both Core EMC and VMware would retain their significant strategic value. Core EMC contains spectacular assets, making the company highly attractive to numerous strategic buyers," he wrote.
That would leave EMC better able to explore merger or acquisition opportunities, Cohn wrote.
"Since the announcement of Elliott’s position in EMC, we have learned of acquisition interest in EMC’s assets on the part of several large companies that make strategic sense and which involve parties that could both afford to acquire the EMC Federation as a whole or distinct assets within the Federation, and could also successfully integrate these acquisitions," he wrote.
Hewlett-Packard is reportedly one party that held advanced discussions about a merger or acquisition deal with EMC. Speculation about a potential deal accelerated this week when HP said it would split into a $56 billion PC and printing business operating as HP Inc. and a $56 billion enterprise computing business that will do business as Hewlett-Packard Enterprise.
As a solution provider, EMC's shareholder value is not a top priority, said Kent MacDonald, vice president of converged infrastructure and network services at Long View Systems, a Calgary, Alberta-based solution provider and long-time partner to EMC and VMware.
NEXT: EMC Federation Works Well For The Channel
"I prefer to look at how they differentiate in the market," MacDonald told CRN. "I look at EMC's suite of companies, and I think I wish I had the insight to have bought VMware 10 years ago."
A federation of companies like the EMC Federation will not always have smooth sailing, MacDonald said.
"But at the end of the day, it brings a complete suite of technologies for EMC storage," MacDonald said. "Companies like VMware and RSA are de-facto standards."
Customers prefer solutions, not just storage, and from that lens the EMC Federation is working, MacDonald said.
"But then I don't own 2.2 percent of EMC," he said. "Instead, I go to EMC World every year. The channel gets bigger and bigger. That tells me that things are working. But I also know change is constant."
One solution provider and close partner to EMC and VMware told CRN via email on condition of anonymity that it is easy to see Elliot’s perspective that EMC and VMware are worth more independently than together.
"They are on a crash course," the solution provider wrote. "The reality is they better try and sell EMC off to a Dell, Lenovo, Cisco or Oracle ASAP as I would say the value of EMC drops precipitously in the next few years as SDN [software-defined networking] takes a toll on them."
PUBLISHED OCT. 9, 2014