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Activist disrupts board review of strategic alternatives to focus on short term stock price


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Source: New York Times DealBook, October 8, 2014 article


Paul Singer’s Hedge Fund Pushes Technology Giant EMC to Break Up

By DAVID GELLES    October 8, 2014 11:05 am

Paul Singer, the founder and chief executive of the activist hedge fund Elliott Management. Credit Steve Marcus/Reuters

Updated, 3:02 p.m. |

Elliott Management, the activist hedge fund that owns 2.2 percent of the technology giant EMC, is calling for the $57 billion company to break itself apart.

In a letter addressed to EMC’s chief executive, Joe Tucci, and the board, Elliott criticized the company for being overly complex and suggested selling off a range of assets. Should EMC follow Elliott’s advice, it would join a wave of big companies, including Hewlett-Packard and eBay, that are breaking themselves apart, bowing to investor pressure.

EMC is best known as an enterprise hardware company, selling products and services to big businesses. But EMC also owns 80 percent of VMWare, a separately traded cloud computing firm valued at nearly $40 billion. EMC also runs a data storage business called EMC II and a security firm called RSA, and owns 90 percent of Pivotal, a smaller big data company.

Elliott, headed by Paul Singer, argues that this structure, which EMC calls the Federation, has caused the company to fall behind its peers. Its stock price is lagging, the core business is undervalued, and different units of the same company are now competing with one another, Elliott says.

“Though EMC is a leader in numerous markets with great products, EMC’s stock price has deeply underperformed its proxy peers and the market over all relevant time periods,” Elliott said in its letter. “Both EMC and VMware have grown and are now competing against one another, confusing customers, employees, Street analysts and shareholders.”



EMC responded to Elliott’s letter on Wednesday afternoon, acknowledging that it had had talks with the hedge fund but stopping short of defending its Federation strategy. “Over the past few months, EMC’s leadership has met with representatives of Elliott several times and has listened carefully to their ideas, as we do with all of our shareholders,” the company said in a statement.

EMC shares, which rose about 2 percent on Wednesday, are up more than 12 percent since the start of the year.

Mr. Tucci, who assembled EMC’s portfolio, is on the verge of retirement after more than a decade of running EMC. While some have called for a full spinoff of VMWare in the past, Mr. Tucci initiated a strategic review at the start of this year, even before Elliott took its stake, according to people briefed on the matter. That led to talks with Hewlett-Packard this summer, which fell apart over price, these people said.

While EMC is still considering its options, and has not ruled out a spinoff of VMWare or a breakup, Mr. Tucci has yet to act. Elliott has been talking with EMC, but decided to make its thoughts on the company public this week in the wake of the announced breakups by eBay and HP.

RSA SecureID keys are part of the security division of EMC. Credit Michael Caronna/Reuters

The main action Elliott is calling for is a tax-free spinoff of VMWare. With the proceeds from that, EMC could buy back stock, Elliott suggests in its letter. Beyond a full spinoff of VMWare, there are a range of options. Pivotal could be floated with an initial public offering, or included in the spinoff of VMWare. EMC II and RSA could be put together into a smaller storage and security company, which could make for an attractive acquisition target for a company like Cisco or Oracle.

Elliott said it had done extensive research into EMC over the last year, including interviewing more than 580 of the company’s customers and consulting with industry experts.

“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,” Elliott said in its letter. “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. Regardless of which path is chosen, the conclusion is clear to us — as it is to many — that the current Federation structure is not right for EMC or its shareholders.”

A version of this article appears in print on 10/09/2014, on page B5 of the NewYork edition with the headline: Calling for a Breakup.


Copyright 2014 The New York Times Company



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