Activist Investor Pushes For EMC Breakup; Partners, Analysts Weigh In

EMC's fifth-largest investor is reportedly pushing EMC to spin off VMware as an independent company, a move many solution providers would support as a way to help VMware become a premier provider of cloud technology independent of the influence of any legacy hardware vendors.

The Wall Street Journal on Sunday reported that New York-based activist investor Elliott Management has acquired a stake of over $1 billion in EMC, making it EMC's fifth-largest investor and giving it the clout needed to try to convince the storage giant to spin off VMware cloud and virtualization developer.

Elliott Management, which the Journal said has about a 2-percent of the vendor's equity value of about $55 million, plans to argue that the "EMC Federation," which includes EMC, VMware, big data and business analytics software developer Pivotal, and security developer RSA hampers the performance of EMC's stock.

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The EMC Information Infrastructure legacy storage solutions form the largest part of the company's business while VMware and Pivotal are growing much faster.

EMC and Elliott Management spokespeople did not reply to requests for more information. A VMware spokesperson wrote in an emailed response to CRN that VMware does not comment on rumors or speculation.

Investors seem to like the idea of an EMC breakup. EMC share prices were up nearly 5 percent at the midpoint of the trading day on Monday at over $28 per share. VMware shares, however, were down about 2 percent at just over $93 per share at the same point in the trading day.

VMware, which is a publicly-listed company despite being 80-percent owned by EMC, is expected to discuss its second fiscal quarter 2014 results on Tuesday afternoon of this week. EMC early Wednesday morning will follow with its own second fiscal quarter 2014 results.

VMware in early 2004 was acquired by EMC.

Spinning off VMware would only be good news, wrote Jed Ayres, chief marketing officer at MCPc, a Cleveland, Ohio-based solution provider and EMC channel partner, in an emailed response to CRN.

"I can definitely see benefits if the two disconnect as VMware has huge upside as a completely independent company…one that will be aiming square at the hardware around storage, compute and networking in the next 5 years. It would be great to see them in NO WAY impacted by a parent company that is tied to legacy hardware models," Ayres wrote.

NEXT: Taking The Potential Breakup Of EMC Seriously

Jamie Shepard, regional and health systems senior vice president at Lumenate, a Dallas-based solution provider and longtime EMC and VMware partner, told CRN such as spin-off would be great news for both VMware and the IT industry as a whole.

Shepard said that, while EMC has been moving a lot of its technologists into VMware, giving the appearance the two are closely integrated, VMware could easily become independent, especially given the depth of its leadership including President and CEO Pat Gelsinger, a former top Intel exec who at one time was considered a candidate to eventually take over the CEO position of both EMC and Intel.

From an industry perspective, such a spin-off could not be better news, Shepard said.

"Everybody is deploying hybrid clouds," he said. "VMware needs to be independent to really be in there."

Shepard said that EMC and VMware partner and potential rival Cisco is already making a big plat in the data center with its Invicta storage and its Application Centric Infrastructure (ACI) software-defined networking technologies. Cisco is also using its Intercloud fabric to bridge public and private clouds, and is getting closer to Red Hat and OpenStack, he said.

"VMware needs to go independent to compete with that," he said. "It would make VMware better able to go along with the industry and lead the efforts as an independent rather than being tied to EMC or any hardware vendor."

A major financial analyst on Monday said it is taking the report seriously.

Anthony Sacconaghi, senior analyst with Bernstein Research, wrote that EMC's share prices have lagged the S&P 500 by a significant amount in the past five years, which has rekindled interest in the company.

"This is not the first time an activist has been involved in EMC's stock – Pershing Square built a position in 2008, which we believe was partly due to the potential of a VMware spinout, but profitably exited its position by the end of 2009, without much saber rattling. At the time, EMC's performance was better and VMware was significantly smaller than today," Sacconaghi wrote.

Sacconaghi wrote that EMC's shares, if VMware or core EMC were spun off from the existing consolidated company, could be worth $33 to $30 per share, far above the current mid-$20 share price.

NEXT: Few Synergies Between EMC And VMware, But A Split Might Take A Proxy Fight

Sacconaghi also wrote that Elliott Management's core rationale for spinning off VMware is that VMware "few operating synergies with core EMC," and that the two are actually competing in terms of software-defined storage (SDS), security, and the cloud.

"We believe that there are few (if any) synergies between the operating businesses of core EMC and VMware. Our channel checks over time have shown that EMC and VMware have had sales conflicts rather than synergies. We see VMware's push into SDS as somewhat redundant with EMC's SDS offerings, and potentially confusing for customers. Finally, our understanding is that VMware's Hybrid Cloud offering... does not use storage from EMC and actually competes with large EMC customers in the service provider and cloud verticals to boot," he wrote.

Even so, Sacconaghi wrote, EMC Chairman and CEO Joe Tucci is on-record as being against a break-up of EMC, and the EMC board of directors supports Tucci, potentially turning such a break-up attempt into a proxy battle.

Not everyone agrees EMC should spin off VMware.

Wells Fargo Securities in a May financial report wrote that EMC should bring VMware back in-house to better compete with IBM, Hewlett-Packard, Cisco Systems, and Dell in the coming converged infrastructure wars.