EMC Reportedly Considering Buyout by VMware Unit

A downstream merger is one of several options executives are looking at that would improve financials and keep the federation model intact.


EMC executives are reportedly considering having the company bought by VMware as one of several restructuring options that would put the storage giant on more solid financial footing and push back at investor pressure to shed its VMware business.

Citing unnamed sources briefed on the discussion, news site Re/code is reporting that EMC CEO Joe Tucci and other executives are reviewing an array of scenarios for adjusting to a changing market that is mobile- and cloud-focused and to ongoing demands from activist shareholder Elliott Management to streamline its operations and return more money to investors.

EMC owns about 80 percent of VMware, a leader in the data center virtualization space. Elliott officials since last year have urged Tucci and EMC executives to spin off VMware to help both companies better realize their business objectives. They also have pushed EMC to get rid of its federation business model, in which the companies that EMC owns—including VMware, RSA (security), VCE (converged infrastructure) and Pivotal (big data analytics)—operate as separate, and at times competing, businesses but also offer integrated solutions.

Tucci has argued against separating VMware from EMC, saying the companies work better together. EMC officials also have negotiated with other tech vendors—including Hewlett-Packard and Cisco Systems—about buying the storage vendor.

EMC has made some concessions to Elliott, including the appointment in January of two new board members approved by the private equity firm. Last month, during a conference call to discuss quarterly financial numbers, EMC executives also announced plans to cut $850 million in annual expenses. EMC and Elliott earlier this year reached an agreement in which Elliott would not publicly pressure EMC to make changes.

However, recent comments by Tucci during the conference call and in other venues—coupled with the agreement with Elliott expiring next month—have fueled speculation that EMC would actually tighten its grip on VMware by buying the remaining 20 percent of the company that had been spun out through an IPO in 2007.

That said, Re/code reported that unnamed sources said that Elliott officials are supportive of the idea of VMware buying out EMC. There were no details about a deal, but according to the news site, sources said VMware would issue as much as $55 billion in new shares, with some of that money being used to wipe out EMC's 80 percent share in VMware and the rest being put toward buying EMC.

Such a move—known as a "downstream merger"—also would appear to be a step toward keeping the federation of companies together, something that Tucci has argued for even as late as last month. During the quarterly earnings conference call, the CEO said that as enterprises move more of their business to the cloud, tech vendors need a broad range of capabilities to offer their customers.

"Data centers are moving to cloud technologies, both private and managed," Tucci said, according to a transcript from Seeking Alpha. "So obviously, if you were doing that, would you rather do that as just VMware, as just EMC, as just Pivotal with their past, or are you a lot stronger in front of a customer doing [all those tasks] together? So, do I think we're much stronger? The answer is absolutely. So I think splitting this federation or spinning off VMware is not a good idea. I firmly believe that we are better together, a lot better together."

Elliott over the past couple of years has become an increasingly active investor in tech companies, buying enough stock in vendors like Juniper Networks, Citrix Systems and Riverbed Technology to gain leverage and then pushing for operational changes in order to return more money to shareholders. Most recently, Citrix executives last week announced that President and CEO Mark Templeton is planning to retire and that the company was reviewing the future of its GoTo online collaboration portfolio.

In addition, Citrix was appointing new board members—including a senior portfolio manager at Elliott and another who would be come with Elliott's approval.