Elliott Said To Push EMC Corporation To Spin Off VMware

EMC Corporation (NYSE:EMC) is apparently being targeted by activist investment firm Elliott Capital Management, which is pressuring it to spin off VMware, Inc. (NYSE:VMW). The Wall Street Journal cites unnamed sources who say Elliott has a stake worth over $1 billion in EMC.

EMC pressured to break up

Elliott’s investment into EMC Corporation hasn’t been disclosed previously. The firm’s stake is approximately 2% of EMC’s equity value, making it the company’s fifth biggest shareholder. The size of the stake also shows the firm’s resoluteness, as it is one of the largest it has ever taken in the 37 years it has been doing business.

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Elliott reportedly wants to talk EMC into spinning off VMware because it believes EMC stock will get a significant boost from that. Currently EMC has about an 80% stake in VMware. The firm is said to be planning to argue that EMC’s corporate structure has essentially poured cold water on its stock.

Stifel backs up Elliott

The activist investment firm isn’t the only one seeing potential benefits from a breakup. In a report dated July 21, 2014, Stifel analysts Aaron C. Rakers, Joseph Quatrochi and Andrew Shinn noted that they had previously suggested that EMC consider splitting up. They looked at the company’s “cheap valuation” and said that a breakup “could drive some value unlocking event in the future.”

They noted that investors have been questioning for some time whether activist investors would get involved with EMC. The Stifel team continues to rate EMC Corporation as a Buy with a $30 per share price target.

EMC follows “federation strategy”

There has been plenty of talk about whether EMC will change its views on its business strategy, including its stake in VMware. The company follows what it calls a “federation strategy,” which refers to its three separate businesses: Information Infrastructure, VMware, and Pivotal, its software development company. Both VMware and Pivotal are growing faster than EMC’s core Information Infrastructure business. VMware’s market value is $41 billion, which is 75% of EMC’s market capitalization.

The Wall Street Journal reports that its sources say that possible buyers of part or even all of EMC may emerge if the company decides to spin off VMware. Some potential suitors that were named are Oracle Corporation (NYSE:ORCL), Cisco Systems, Inc. (NASDAQ:CSCO) and Hewlett-Packard Company (NYSE:HPQ).

Last year, EMC Corporation had $23.2 billion in revenue. The company is scheduled to release its next earnings report on Wednesday. Analysts are predicting earnings of 96 cents per share and revenue of $160.8 million for the second quarter.