EMC Swings Its Partners in Rumored Deal Talks

Intrigue is thick surrounding EMC these days. The story line, pieced together from various reports, goes something like this: An activist shareholder is pressuring EMC to sell itself to companies that are interested — or at one time were interested — in acquiring the data storage giant. Considering EMC’s size, the list of suitors is short. The two names that keep circulating are HP and Dell.

The unfolding story has been long in the making. EMC has been discussing merger possibilities with HP for a year or longer, sources have told reporters at various times. Whether those talks could reignite now that Dell is in the picture is unclear.

If EMC should decide not to put itself on the auction block, the shareholder in question, Elliott Management, which has a US$1 billion stake in EMC, appears to be willing to settle for the sell-off of its highly profitable VMware interests.

Meanwhile, EMC’s leadership is heading for a reshuffling. The company’s 13-year CEO, Joseph Tucci, is expected to retire in the first quarter of 2015, but no successor has been named.

Teasing out what may actually be occurring behind the scenes and what could be pure invention is no small task.

“There are a lot of variables here,” noted Laura DiDio, principal of ITIC.

An Aggressive Shareholder

One piece of the story that is easy to accept is the likelihood that Elliott Management is placing pressure on EMC in order to monetize its investment.

“What I have heard is that it is pushing for a breakup in order to bring the asset price up,” Rob Enderle, principal analyst at the Enderle Group, told the E-Commerce Times.

That is standard operating procedure for many institutional shareholders, he said. Spike the price of the company one way or another and then make a ton of money on the investment.

Tucci doesn’t want to sell off EMC or carve off pieces of its holdings, as Enderle sees it, so he is going through the motions of having discussions.

“When an activist investment group pushes you to do something, then discussions will certainly happen,” Enderle said. “However, I can’t see the current executive team in place at EMC dissolving the company.”

Executives tend to resent activist shareholders and their short-sighted view of monetizing for profits. That is why Michael Dell took Dell private, which is a bit ironic, considering it supposedly is one of the companies wooing EMC.

Some Logic to the Proposals

There is actually some business logic to Dell or HP acquiring EMC, DiDio told the E-Commerce Times — but practically speaking, it would be difficult for either company to execute.

“There is a viable case for acquisition, and the timing is interesting in that respect too — a lot of rumors about acquisitions heat up in the fourth quarter,” she said.

However, it takes a special talent — or rather a special deep bench of talent — to make an acquisition of this size work, and neither Dell nor HP has the chops to do it right now, DiDio said.

HP ruled out any major acquisitions in its recent earnings call, Didio noted. “CEO Meg Whitman has said she is only interested in small to medium-sized acquisitions, or companies that will help fuel HP’s organic growth.”

Also, the company announced a round of 11,000-16,000 layoffs this May, following a workforce reduction of 24,000 in 2012. A multibillion-dollar acquisition doesn’t seem to be an appropriate follow-up.

As for Dell, its profit margin is razor thin at the moment, DiDio said.

“Michael Dell is doing better than Meg Whitman is with HP, but he still has to recover from the last six to eight years of management tumult,” she noted.

The most plausible scenario is that EMC will sell VMware, DiDio suggested.

“VMware has a huge market cap, and there are people who think now is the perfect time for EMC to cash in,” she said.

Also, if EMC sold VMware, it would be on better financial footing,” she said, “and in a better position to withstand a hostile offer.”

Erika Morphy has been writing about technology, finance and business issues for more than 20 years. She lives in Silver Spring, Md.

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