Sterne Agee has analyzed the potential outcomes of Elliott’s involvement with EMC Corporation (NYSE:EMC) and thinks regardless of which path is taken it is likely supportive of the stock.
In a report released today, Sterne Agee analysts Alex Kurtz and Amelia Harris speculate the most likely scenario is an increased buyback that could reach up to $8 billion in addition to other potential actions EMC consolidated could take on the expense line. Whatever path is chosen it is likely supportive of the stock and the brokerage firm’s $32 price target. EMC closed yesterday at $29.
Elliott pressuring EMC to spin off VMware
As reported in ValueWalk, Paul Singer’s Eliott Management took an activist role in the stock on July 21, pressuring EMC Corporation (NYSE:EMC) to spin off VMware, Inc. (NYSE:VMW), which is 80 percent owned by EMC. Reports have said Elliott has close to $1 billion invested in EMC.
The Sterne Agee report notes three primary potential paths:
1) EMC will likely expand its repurchase program beyond the current $3 billion authorization, which appears to be the consensus view of the EMC institutional shareholders. The Sterne Agee report notes this is the most likely of all the proposals due to the ability for the firm to raise inexpensive debt and maintain its VMware ownership. Sterne Agee is considering include increased cost cutting at the firm to boost stock buy backs, which could push the buyback number over the $8 billion mark.
2) Discussions of the Federation’s future cross-selling synergies and cost-savings opportunities, with specifically more cross selling between EMC and VMware. This could include EMC’s sales force taking a more direct approach in selling VMware, Inc. (NYSE:VMW) licensed product. Moving in this direction would directly contradict the third potential outcome. EMC would be expected to more directly quantify the positive financial impact of VMware on its results.
3) The likelihood of EMC spinning out VMware, which is Elliott’s proposal. Sterne Agee calls this the longest to develop of all outcomes and could take several years of proxy votes to effect change at the board level.
EMC’s Federation strategy
The primary battleground is going to be the Federation of EMC Corporation (NYSE:EMC) and VMware, Inc. (NYSE:VMW), is separate analysis. Just days after Elliott announced its desire to see EMC spin off VMware, EMC management went on the offensive. EMC offered a defense of its Federation strategy. “The Federation strategy is a way for EMC to attract the best talent to run businesses that take advantage of emerging technology trends,” Jeremy Burton, EMC’s President, Products and Marketing, said in an interview. “We were able to attract great talent to [virtualization software maker] VMware that way — giving them equity in a startup and later exposing a portion of it to the public markets. And the $600 million we invested in VMware is now worth $39 billion.”
Another benefit of the Federation strategy, according to the report, is that it gives customers much more flexibility. “VMware is like Switzerland — it is neutral among different hardware vendors which means that a VMware, Inc. (NYSE:VMW) customer can buy hardware from EMC, Dell Inc. (NASDAQ:DELL), Hitachi, Ltd. (ADR) (OTCMKTS:HTHIY) (TYO:6501), or NetApp Inc. (NASDAQ:NTAP),” Burton said. “We think that this approach will help us tap into emerging technologies.” This flexibility pitch might not correlate 100 percent with the firm’s enhanced cross selling strategy, is separate analysis.