The investment management firm owns 2.2% stake in EMC Corporation (NYSE:EMC), a $57 billion company that operated three federated businesses. EMC CEO Joseph Tucci is the architect of the federation structure of the company.
In its letter, Elliott Management said the structure of EMC Corporation (NYSE:EMC) “obscures enormous value.” The investment management firm urged the company to pursue different ways to recognize value including the separation of VMware, Inc. (NYSE:VMW) and various merger and acquisitions opportunities.
Elliott Management says EMC underperforms peers
EMC Corporation’s (NYSE:EMC) federated businesses include EMC II, VMware, RSA and Pivotal.
Elliott Management described the company’s structure as unusual given the fact that each of its federated businesses is operating as independent companies and headed by a CEO. The investment management firm added that the federation structure of EMC Corporation (NYSE:EMC) is no longer effective today.
“The reality today is that the Federation structure, which may have served EMC well years ago, no longer does,” wrote Elliott Management.
The investment management firm emphasized that the stock performance of EMC Corporation (NYSE:EMC) underperforms its peers and the market in all relevant time frames.
Elliott Management pointed out that the core EMC was deeply undervalued under its federation structure.
EMC’s federation structure is no longer viable
Elliott Management noted that EMC Corporation (NYSE:EMC) and VMware, Inc. (NYSE:VMW) have grown and competing against each other. The companies are also confusing customers, employees, analysts and shareholders.
“EMC II and VMware are not together enough to have completely joint infrastructure, development and go-to-market capabilities, or to eliminate confusion among customers, employees and investors. However, they are together enough to create damaging competitive dynamics and to hinder essential third-party partnerships,” wrote Elliott Management.
The investment management firm added, “Joe is the architect and manager of the federation. It is not viable to keep the structure as it stands today beyond his tenure as CEO,” according to the investment management firm.
Elliott Management pointed out that the federation structure “adversely impacts” VMware, Inc. (NYSE:WMW), a leader in server virtualization and a potential leader in virtualizing storage.
The investment management firm believed that separating VMware would create extremely meaningful financial and operational benefits over the long-term.
“We believe now is not only a great time, but the optimal time for EMC to establish a future structure that makes financial and strategic sense for the long term. Whether through a tax-free spinoff of VMware or through M&A, the options are compelling due to the incredible quality of EMC’s assets,” said Elliott Management.
The full letter can be found below
October 8, 2014
The Board of Directors
176 South Street
Hopkinton, Massachusetts 01748
Attn: Joe Tucci, Chairman & CEO
Dear Joe and Members of the Board:
I am writing to you on behalf of Elliott Associates, L.P. and Elliott International, L.P. (collectively, “Elliott” or “we”), which collectively own 2.2% of the common stock and equivalents of EMC Corp. (the “Company” or “EMC”), making us one of your largest shareholders. We greatly appreciate the dialogue we have established with Joe and his team and we look forward to continuing it.
Since the publication of news reports detailing our position, we have received numerous calls from fellow shareholders requesting our views and sharing theirs. In addition, EMC management has spoken publicly about their view of the Company’s structure. The purpose of today’s letter is to share our thoughts on the right path forward. We hope this will help to inform Joe and the Board as part of EMC’s current review process regarding the long-term value-maximizing pathway for the Company.
The summary takeaways from our letter, which are more fully described below, are:
- EMC’s current structure – “the Federation” – obscures enormous value at EMC
- EMC should pursue pathways to recognize this value, including a separation of VMware from Core EMC and/or various M&A opportunities
Elliott is an investment firm founded in 1977 that today manages approximately $25 billion of capital for both institutional and individual investors. We are a multi-strategy firm based in New York, active in debt, equities, commodities, currencies and various other asset classes across a range of industries. Investing in the technology sector is one of our most active efforts at Elliott and one in which we have built a long track record.
Our approach to EMC is consistent with our approach to many of our current and previous technology investments. We have conducted extensive research to better understand the Company’s operations and strategy, including working with respected technology and management consultants to examine the broader storage, data center virtualization, security, big data analytics and end-user computing landscapes, and EMC’s position within those markets. We have also worked with engineers to examine and assess the capabilities and competitive positioning of EMC’s products and technologies across all of its offerings. Our efforts during the past year include a survey of over 580 EMC and VMware customers, enabling us to better understand the storage and data center virtualization landscape from a buyer’s perspective and to identify what factors are most important in driving purchasing behavior. We have also retained senior executives in the storage, data center virtualization and broader technology marketplaces to advise us on higher-level corporate considerations. We believe this time- and resource-intensive exercise has given us a strong understanding of the markets in which EMC participates, as well as a deep appreciation for the Company’s competitive strengths and challenges.
Our Thoughts on EMC
We have grouped our thoughts into the following three categories, which we discuss more expansively throughout the remainder of this letter:
2.EMC and the Reality Today
3.The Right Course Forward
It is important that we convey that Joe, for whom Elliott has the highest respect, and his team deserve immense credit for assembling, integrating and building EMC into what it is today. The substantial value opportunity we describe in Section 3 is only possible due to the high quality of the Company and its individual businesses.
EMC has developed an incredible set of assets including EMC II, VMware, RSA and Pivotal. Each of these companies is comprised of acquired and organically developed product offerings and businesses that by themselves are frequently the best in the industry.
It is well known and has been broadly recognized by those who follow EMC and its markets that the structure of the Company is unusual: VMware, Pivotal, RSA and EMC II are run as independent companies. Each of VMware, EMC II and Pivotal is headed by a CEO who reports to Joe. RSA is headed by a CEO-level executive who reports to David Goulden, EMC II’s CEO (and, until last week, CFO of EMC). EMC management refers to this arrangement as “The Federation.” (Follow this link for a graphic illustration of the Federation:http://elliott-graphics.com/slide1.html).
The origin of this unorthodox structure is an important part of the story: EMC used to be only what is now called “EMC II,” the storage company. Over the years, however, EMC bought VMware (2004), RSA (2006), and