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Activist Investor Pushes EMC to Break Up

Elliott Management Says Spin-Off of VMware Would Boost Stock Price

By Dana Cimilluca and Shira Ovide

Elliott Management Corp. has taken a stake of more than $1 billion in EMC Corp.and plans to push the data-storage giant to break itself apart, according to people familiar with the matter.

The investment, which hasn't been previously disclosed, amounts to about 2% of the Hopkinton, Mass., company's $55 billion equity value, and would make the hedge fund its fifth-largest shareholder, according to the most recent data available from FactSet. It is one of the largest positions Elliott, a 37-year-old firm with $25 billion under management, has ever taken.

Elliott is expected to argue that the company's present structure has hampered the performance of EMC's stock.Elliott will seek to convince EMC that the company's lagging stock would receive a substantial boost if it were to spin offVMware Inc., a pioneer in computer-server software, these people said. EMC owns a roughly 80% stake in VMware, which is publicly traded.

"We're always happy to meet with our shareholders," an EMC spokesman said. He declined to comment further.

With $23.2 billion in revenue last year, EMC is made up of three businesses strung together in what the company refers to as its "federation strategy." They are: EMC Information Infrastructure—its traditional center of gravity, which dominates the data-storage-systems business—as well as VMware and software-development company Pivotal, which are both faster-growing. VMware trades publicly and has a market value of $41 billion, or 75% of EMC's market capitalization.

Should EMC move to split off VMware, potential buyers of part or all of the company could emerge, according to people who could ultimately be involved in such deals. Industry players who could be interested in part or all of EMC include Oracle Corp., Cisco Systems Inc. and Hewlett-Packard Co., analysts have said.

Oracle and H-P declined to comment on the possibility of their companies' interest in purchasing all or parts of EMC. A spokesman for Cisco didn't immediately respond to a request for comment.

If Elliott is successful, a breakup or sale could cause ripples through the roughly $2 trillion annual market for hardware, software, and technology services sold to companies, given what a significant player EMC is in server and storage systems. Elliott's investment in EMC also spotlights how size is increasingly not a barrier for activist investors, who have lately set their sights on some of the world's largest companies.

EMC is facing a number of headwinds. An emerging technology for saving digital data, known as "flash" storage, is giving upstarts a chance to dislodge EMC, which for years has been the dominant seller of hardware companies use to save data troves. Some companies, rather than buying gear from EMC, are storing data outside their computing centers with "cloud" services from providers such as Amazon.com Inc.

In the first quarter, EMC's sales rose by less than 2% from the same period a year earlier, while its net income dropped by roughly 30%. The company is set to report second-quarter results Wednesday.

EMC shares, which more than a decade ago soared above $100, now change hands for less than $27. They have risen 163% in the past 10 years, compared with a more than 309% gain for the Dow Jones U.S. Computer Hardware Index, even as VMware's value has soared. The Nasdaq is up 135% over the past 10 years.

Some analysts have argued that EMC's stock price doesn't reflect the full value of its traditional storage business and a separation of VMware could address that.

Elliott is expected to argue that VMware and the storage business are held back by the present structure, in which in some cases they compete with each other.

Elliott in the past week called EMC to inform it of the investment, and fund officials plan to meet with EMC Chairman and Chief Executive Joe Tucci, the people said.EMC said in a recent filing that its federation strategy "allows each of the three businesses to individually build products … they need to succeed in their respective markets while sharing the same ultimate goal of helping customers manage information."

Elliott has owned EMC shares on-and-off for a decade. Its current investment comes as Mr. Tucci, who has been CEO since 2001, is expected to retire around February 2015. The 66-year-old Mr. Tucci has put off previous retirement dates, however.

Shareholder activists like Elliott have become an increasingly potent force in corporate America in recent years, often successfully pushing companies to spin off divisions or sell themselves in whole or part.

Technology companies used to be seen as too large and complex to find themselves in activists' crosshairs, but that is changing too.

ValueAct Capital recently secured a seat on Microsoft Corp.'s board, and Carl Icahnpushed eBay Inc. to spin off its PayPal unit, before making peace with the company when it agreed to appoint a director he favored.

Elliott has made a slew of technology investments over the years, in many cases successfully pushing the companies to make changes. It has for example taken stakes in BMC Software Inc., Juniper Networks Inc. and NetApp Inc., an EMC competitor.