EMC Corp. (EMC) continues to face activism from hedge fund Elliot Management Corp. The company recently received a letter from the fund, which urged it to unlock shareholder value. In the letter, Elliott Management, which is one of the EMC’s biggest shareholders (2% stake), demanded that the latter should spin off VMware, in which it has an 80% controlling stake.
Eliott Management has also asked EMC to look for strategic merger & acquisition opportunities. This is particularly important since EMC was reportedly contemplating mergers and other strategic options some time back.
Per Reuters, which quoted The Wall Street Journal, EMC had discussed with the likes of Dell, Oracle, Cisco (CSCO) and Hewlett-Packard (HPQ) over possible mergers.
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 companies could reject the deal. This combination would have created a mammoth technology company with a market capital of approximately $129 billion.
However, we believe that H-P’s split into two distinct entities renews the possibility of a merger deal going forward.
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.
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 also blames this management structure for the company’s lagging share price.
Earlier in July, Elliot had approached EMC with the same proposal, which the latter had rejected. However, 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 # 3 (Hold).
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