EMC Federation Fragile or Built To Last?
September 1st 2015 marks the deadline when the truce between Elliott Management Corporation, a hedge fund manager, and EMC Corporation ends. The industry wonders if the Elliott’s onslaught will push EMC into the brink of a break-up.
Since 2014, Elliott Management has been pushing for the breakup or the part sale of the EMC Federation. EMC stock has been seen as a laggard by Elliott. The following historical stock chart of EMC is from Yahoo! Finance:
Elliott believes that EMC’s stock is better off without VMware, or if EMC sheds off its “partners” in the so-called Federation, its stocks would perform much better. The EMC “Federation” has been a unique entity in the IT industry. Since the late 90s’, EMC has been a great gobbler of technology companies. Notable ones include Data General, Legato, Documentum, RSA, VMware, Data Domain, Isilon, and the recent one, VirtuStream.
The one acquisition which stands out is VMware. EMC acquired VMware in 2004 but released 15% of VMware’s equity for public offer in 2007. The x86 hypervisor technology created by VMware took the world by storm and became the foundation of the server, desktop and application virtualization that we see today. VMware became the darling of the private cloud computing world, and is a much more attractive stock compared to its parent, EMC.
As preparation met opportunity, the big data analytics acquisitions of EMC began to gel into Pivotal Software. EMC owns the majority of Pivotal Software similar to VMware, with GE (General Electric) owning 10% of Pivotal since 2013. Together with its own EMC infrastructure business, the EMC “Federation” consists of 3 main divisions:
|EMC II||David Goulden||$18.2 Billion|
|VMware||Patrick Gelsinger||$ 6.0 Billion|
|Pivotal Software||Rob Mee||$227 Million|
Any industry observer would be in awe of how well Joe Tucci, the CEO of the EMC holding company, has managed the EMC “Federation”. But EMC’s stock has been quite stagnant in the market for quite some time, unable to jolt the excitement to the shareholders. Elliott Management, which own 2% of EMC, decided to stir things up last year, hoping to bring some life back into the EMC stock. It called for many things. Some options included:
The Elliott “attacks” were quite relentless in the second half of 2014, so much so that EMC decided to cool things down. In January 12th 2015, EMC agreed to add 2 approved board members to its board to appease Elliott Management’s “attacks”. In return, Elliott Management agreed not to push for more board members or buy more of EMC’s stocks until September 1st 2015.
As an investor, a sound and reliable business model is always more important than an attractive stock price. The stock market is always irrational in the short term, but a resilient business model and a proven strategy beats a good stock price any day. EMC is now a 30-year old company, and in a technology market, that is like an aeon of years. It had stood the test of time and became a model company, growing and innovating at a foundation pace. It may not be a pace Elliott Management might like but EMC wouldn’t be EMC today without that mantra.
Joe Tucci has repeatedly said that EMC and its subsidiaries are better together. Indeed it is true.