Reportedly, data storage provider EMC Corp. (EMC) is contemplating a merger and other strategic options amid growing pressure from activist hedge funds. Per Reuters, which quoted The Wall Street Journal, EMC has been in discussions with the likes of Dell, Oracle, Cisco (CSCO) and Hewlett-Packard (HPQ) over a possible merger.
However, discussions between EMC and H-P reportedly fell through after they failed to agree on the financial aspect of a possible deal. It was also feared that shareholders of both the companies could have rejected the deal. A deal between the two would have created a mammoth technology company with a market capital of approximately $129 billion.
Regarding negotiations with Dell, the details are quite vague. It seems that Dell could be interested in acquiring part of EMC — most likely its storage division, which will significantly expand its enterprise hardware product portfolio.
EMC has a joint venture with Cisco called VCE. However, the relationship between the two companies has deteriorated of late, after VMware acquired software-defined networking provider Nicira, which is a competitor of Cisco.
Regarding a deal with Oracle, not much detail is available. However, we believe that Oracle may not be interested in a merger right now, as it remains busy with the MICROS integration. Moreover, Oracle is focusing more on fast growing areas like Big Data, mobile, flash technology and security. Hence EMC’s slowing storage business will not be a strategic fit for Oracle.
EMC’s management has been under pressure due to weak results of the core storage business. The core data storage business has been struggling due to growing competition from flash storage providers such as Nimble Storage (NMBL), SanDisk and Western Digital.
The underperformance has led to growing activism from shareholders. Elliott Management, which is one of the five biggest shareholders (2% stake), has demanded that EMC spin off VMware, in which it has an 80% controlling stake.
EMC has a federal business structure comprising three segments — EMC Information Infrastructure, Pivotal and VMware having their own Chief Executive Officers (CEOs), who report to long-time CEO and Chairperson Joe Tucci. Elliott Management blames this management structure for the company’s lagging share price. The hedge fund believes that the VMware spin off will unlock significant value for shareholders.
CEO Tucci is set to retire in Feb 2015, which is probably another reason behind EMC aggressively exploring strategic alternatives. Although the company has rejected Elliott’s proposal, we believe that if management fails to find any other suitable option, EMC may eventually agree to lower its stake in VMware, in order to pacify growing resentment among investors.
Currently, EMC has a Zacks Rank #2 (Buy).
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