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    Investor Pushes EMC to Spin Off VMware

    Written by

    Jeff Burt
    Published October 10, 2014
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      A key EMC investor is ramping up the pressure on the data storage vendor to shed its 80 percent stake in VMware in the wake of Hewlett-Packard’s announcement that it was breaking up the tech giant in hopes that two independent companies will be more successful in their respective markets.

      Two days after HP CEO Meg Whitman said that in the next 12 months HP will split into two new companies, private equity firm Elliott Management—which owns a 2.2 percent stake in EMC worth about $1 billion—sent a letter to EMC’s board of directors urging it and Chairman and CEO Joe Tucci to sell off its VMware investment and do away with the federation management model implemented by Tucci.

      VMware is a drag on EMC’s core business, and the federation model no longer works the way it had in the past, Elliott Management said in the Oct. 8 letter, signed by portfolio manager Jesse Cohn.

      “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,” Cohn said in the letter. “Whether through a tax-free spin-off 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.”

      This isn’t the first time Elliott Management has made such a proposal. In July, reports surfaced that officials with the investment company had contacted EMC about meeting with Tucci and board members to lay out their concerns that EMC’s relationship with VMware—which it bought in 2004—was hindering both companies from reaching their full value. Tucci days later said during a conference call with analysts and journalists that while he was open to talking with Elliott representatives, he was reluctant to ditch VMware.

      “To me, splitting them up [and] spinning out one of your most strategic assets, I don’t know of another tech company that has done that and been successful,” he said.

      Officials with Elliott—which also has been active in changes at Juniper Networks and Riverbed Technology—reiterated their argument in the most recent letter, saying for example that it has reached the point where EMC and VMware have become competitors in the area of software-defined storage and cloud-based storage.

      “Service providers are one of EMC II’s fastest growing verticals and EMC II’s relationship with these customers is critical, particularly as the storage customer base consolidates with more traditional enterprise customers turning to these telcos for cloud storage offerings,” Elliott’s Cohn wrote. “However, VMware is directly competing with those customers through its vCloud Air offering, a hybrid cloud service built, owned, operated and supported by VMware through eight data centers globally. We have heard repeatedly that this new source of competition has recently become an issue for EMC II’s telco customers, who now have their storage vendor’s affiliate competing against them in cloud services.”

      Investor Pushes EMC to Spin Off VMware

      In addition, EMC’s federation strategy is becoming unworkable, according to Elliott Management. Under the model, EMC’s businesses—VMware, RSA (security), EMC II (storage) and Pivotal (big data and platform-as-a-service, or PaaS)—run as independent-minded entities that will leverage their capabilities to offer end users stacks of services and solutions, all of which is managed by EMC and Tucci. However, the federation model can only work with Tucci in charge, and as part of a succession plan, it should go away, Elliott officials said.

      A day after Elliott sent its letter to EMC, the company announced the first of five planned software-based data center offerings that leverage technologies from the various businesses. The Federation Software-Defined Data Center Solution includes management, orchestration, hypervisor, cloud and networking technologies from VMware, storage and data protection technologies from EMC, PaaS offerings from Pivotal, and a choice of hardware that includes systems from VCE.

      As Elliott pushes its argument, there also was speculation that EMC and Cisco Systems were considering pulling their financing from VCE, a joint venture between them and VMware that builds converged data center solutions. Spokespeople with both Cisco and EMC denied plans to withdraw support from VCE, though some reports have said the companies will not invest any more money in the joint venture.

      In addition, the latest round of speculation comes weeks after reports surfaced that EMC and HP had been negotiating a merger for about a year before talks broke off.

      HP’s decision to split in two is part of a growing trend in the tech industry in which larger vendors are breaking apart or shedding businesses to become more focused, nimble and profitable. For example, Symantec officials Oct. 9 said the company was splitting in two, with one business focusing on security software and the other on storage and information management. In late September, eBay said it plans to spin off its PayPal online payment processing management business.

      Jeff Burt
      Jeff Burt
      Jeffrey Burt has been with eWEEK since 2000, covering an array of areas that includes servers, networking, PCs, processors, converged infrastructure, unified communications and the Internet of things.

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