What Now For EMC? Many Possibilities After HP Deal Nixed

Pressure Builds For EMC To Take Action

Former Notre Dame football coach Lou Holtz once said, "In this world you're either growing or you're dying so get in motion and grow."

Some EMC investors, led by Elliott Management and its 2 percent stake in EMC, have taken that expression to heart, pushing EMC to get in motion to grow its value by splitting up and/or selling itself.

While talks between EMC and Hewlett-Packard about a possible merger or acquisition are now finished, EMC has many options to consider as it looks to address investor concerns about the company's future and its valuation.

Turn the page for some background and a look at the possible responses to investor concerns.

Grow, Shrink Or Die?

Some EMC investors argue investors would be better off if EMC were broken up and/or sold. They point to EMC's complicated organization, specifically the EMC Federation that includes EMC Information Infrastructure, virtualization and cloud leader VMware, the Pivotal big data and developer business and the RSA security business.

EMC thinks it does better as a whole, with each part of the EMC Federation taking advantage of synergies with other parts to be among the top three leaders in nearly every part of its business.

Yet the company as a whole is growing slowly. Revenue during the company's second fiscal quarter hit $5.9 billion, up 5 percent over last year. GAAP earnings totaled $589 million, down from last year's $701 million.

Do The Math

Joseph Wittine, a senior equity analyst at Independence, Ohio-based financial analyst firm Longbow Research, told CRN in September the math makes a pretty compelling argument for EMC to merge or get acquired.

EMC's market capitalization is about $61 billion, including $40 billion for VMware. EMC's 80 percent stake in VMware accounts for about $32 billion of EMC's total value. Subtract that $32 billion from $61 billion, and EMC's core business valuation is about $29 billion.

Applying that math to EMC's estimated fiscal year 2015 earnings, in which VMware is expected to earn about $1.5 billion of EMC's $4.4 billion in earnings, gives core EMC estimated earnings of about $2.9 billion. That's a capitalization of about 10 times earnings, compared to 14 times for rival NetApp.

What To Do, What To Do...

EMC has a lot of options now, including:

-- Do nothing. Keep the status quo.

-- Sell or spin off part of the company.

-- Merge with or get acquired by or acquire a large systems vendor.

-- Do a radical restructuring of the business.

Turn the page to explore some of these options.

Don't Worry, Be Happy

Should EMC elect to keep the status quo as an independent company with the EMC Federation, it would likely be looking at slower growth than many industry peers.

However, the key to this is EMC is a leader in every part of its business. It is poised to enjoy strong, and usually growing, market share in most of its business activities, giving it plenty of runway to make changes as needed in the future.

One concern of investors, however, is the fact that Joe Tucci (pictured), who is one of the most widely-respected chairman and CEOs in the IT industry, has already extended his retirement date. And while EMC has many of the industry's top executives heading its EMC Federation companies, Tucci's eventual retirement is a concern.

Spin Off/Out VMware

A major goal of EMC's investors is to get EMC to spin out or spin off its 80 percent stake in VMware, or to sell it to another company. Such a move would make EMC a smaller company, but would provide cash with which to make other core acquisitions. And EMC is one of the best when it comes to making acquisitions work.

Such a move could have a major negative impact on IT, however. EMC has been as good a steward of VMware as any company could be, investing in its growth while ensuring it remains independent and able to partner with anyone including EMC's biggest rivals. Should another vendor gain control but not maintain that independence, VMware's value to the industry would shrink substantially.

Sell Or Spin Out/Off RSA

RSA is another part of EMC that could do well as a stand-alone company.

Despite a 2011 hack against RSA's SecurID tokens, and a 2013 report that the National Security Agency (NSA) paid for a back door to RSA's encryption technology, RSA is still a leading provider of IT security technology. Several companies, including Oracle and Cisco, would likely be interested in acquiring RSA, although it might have to compete with Symantec for a potential deal to get acquired as Symantec splits into separate security and information management companies.

Pursue M&A Opportunities With The Big Boys

EMC this year has talked to a number of companies about either merging with them or acquiring or being acquired by them, according to reports.

One potential deal, with HP, appears this week to have been taken off the table. However, a deal with another large IT vendor is certainly possible. The caveat is, it would have to be someone really, really big to be able to make a deal work with EMC.

The cost of such a deal could be mitigated by EMC selling off parts of itself, such as VMware or RSA, before such a deal closed. However, getting VMware would likely be a major reason for doing such a deal in the first place, and there's nothing else EMC could sell to bring anywhere near the savings a sale of VMware would.

Who could do such a deal? There are a few possibilities, as seen on the next few pages.

EMC And Cisco?

Cisco is often thought of as the most likely company to merge with EMC. The two actually considered such a deal in the past but couldn't get past the price. Of course, EMC is more expensive now.

Cisco and EMC are close partners in most of what they do. There is a tiny bit of overlap between Cisco's Invicta all-flash storage offering and EMC's storage technology, but given issues Cisco is having with Invicta, pushing that aside would not be an issue.

The much bigger issue is the huge overlap between VMware's NSX and Cisco's ACI software-defined networking technology. Selling VMware would solve that, but VMware would be a great acquisition for Cisco.

EMC And Oracle?

Oracle could add nearly all of EMC's storage to its own storage line, which is primarily focused on the open source ZFS technology. And Oracle has little overlap with other EMC technology, with the exception of OracleVM, its virtualization technology which competes with VMware.

One big problem with thinking about such a deal is Oracle's focus on selling engineered systems. The thrust of the company's hardware sales is on appliance-like solutions which tightly integrate its software with its hardware, leaving relatively little room to sell much of EMC's stand-alone product lines.

EMC And Lenovo?

Now here's a real possibility. Lenovo has grown quickly via its acquisition of IBM's PC and x86-based server businesses. The company is also a strong technology partner with EMC which uses Lenovo hardware as the base for much of its storage solution and provides server expertise to Lenovo to make it easier to integrate with EMC solutions. Lenovo is only a minor provider of storage, virtualization and cloud technology, but that would change with a deal to get EMC.

Could Lenovo pull it off? If it can get the funding--and the U.S. government signs off--on a deal for IBM's x86-based servers, it can do so for EMC.

Adapt And Restructure For The Future

EMC is no stranger to re-organizing itself as needed to meet business requirements. Indeed, it is currently in the midst of a new reorganization to bring most of its storage business into two divisions called the Core Technology Division and the Emerging Technology Division. This is happening even as EMC starts offering solutions integrating components from different parts of the EMC Federation.

EMC could also do something radical such as move its storage technology away from being based on hardware and going with a complete software-defined storage strategy. That would cause a big drop in revenue, but the uptick in earnings would likely also be huge.