MorningWord 9/22/14: Run $EMC? It’s Tricky.

by Dan September 22, 2014 9:33 am • Commentary

I wasn’t exactly sure which long suffering tech under-performer of the Bull Market would be first to cry uncle, but the Wall Street Journal this morning is reporting that EMC Corp (EMC) is exploring options at the behest of activist investor Elliott Management.  Per the WSJ:

EMC for nearly a year held off-and-on merger discussions with Hewlett-Packard (HPQ) though those talks recently ended, according to people familiar with the matter. It isn’t clear whether the talks could be revived.

Another company that has recently held talks with EMC is Dell Inc., people familiar with the matter said. It isn’t clear where any talks between the two companies stand. Given their relative sizes, it is unlikely Dell would contemplate a full takeover of EMC, and might instead seek to purchase assets including its core storage business, one of the people said.

Other companies that analysts and others regard as potential deal partners for part or all of EMC include Cisco Systems (CSCO)and Oracle Corp (ORCL).  It is possible none of the alternatives EMC is contemplating will bear fruit.

Recently activists unhappy with EMC’s equity returns have suggested unlocking shareholder value by a spinout of what the WSJ calls their “crown jewel”:

EMC is made up of three businesses: EMC Information Infrastructure, its traditional center of gravity, which dominates the data-storage-systems business; VMware (VMW) a pioneer in virtualization, a technology that substitutes physical computer servers and other forms of hardware with software; and software-development company Pivotal. VMware, which trades publicly, is now EMC’s crown jewel, and has a market capitalization of $40 billion, accounting for most of its parent company’s value. EMC owns a roughly 80% stake in VMware.

Now to be very clear, when I referred to EMC as an under-performer, it’s important to make the distinction on the time period of that underperformance.  From the lows in 2009, the stock is up more than 200%, basically mirroring the gains of the S&P500 in the same time period:

EMC 5 year chart from Bloomberg
EMC 5 year chart from Bloomberg

Since the end of the tech bubble though, EMC is still down 70%, albeit from valuations not likely to ever be seen again:

EMC since 2000 from Bloomberg
EMC since 2000 from Bloomberg

From purely a technical standpoint, if EMC were to establish a new range above $30, there is little overheard resistance for another 20 or 30%.

So what’s changed now?  Activists possibly see the window for driving corporate change that could positively influence share prices nearing an end as the epic 5 year rally could be coming to an end, with the Federal Reserve ending its policy of QE.  So it’s kind of like “smoke em if you got em”.  If you see your mark, and have already made contact, but see the ground moving a little below your feet you better get moving, before time runs out.

Paul Singer, Elliott Management’s founder and head, certainly has negative views about the U.S. market as a whole.  CNBC reported on his July investor letter:

Billionaire investor Paul Singer thinks stocks are way overvalued.

“By all measures, the U.S. stock market is currently frothy,” the founder of $24.8 billion hedge fund firm Elliott Management wrote in a letter to investors Monday.

Singer repeated his long-held view that central banks are creating asset bubbles through their market stimulus programs.

However, Mr. Singer is still looking for the few pockets of value, and he mentioned activist stakes as one of the main areas of focus:

Singer said the fund is finding new investment opportunities in activist equity positions, arbitraging corporate events, and global real estate in Europe and Japan.

EMC has been a fairly decent performer in 2014, up about 18%, almost double that of the Nasdaq Composite.  Valuation is not a layup on the merits of the EMC core, as the stock trades at about a market multiple, despite earnings and sales that are only expected to be mid single digits. Their dividend has a yield of about 1.5%, but again, EMC investors would like to see a little value bump from the mid teens growth over at VMW.  The main focus for Elliott is likely the non-core assets, as well as the overall level of leverage at EMC.  Elliott made a similar push at NTAP (another storage name) last year, though it later sold that stake without a major result.

As for large tech Mega Mergers, few in history have made sense five or ten years out, they have been textbook value destroyers with the most valuable asset usually being cost savings (think tens of thousands of job cuts). But I would add if you are keeping track at home for what will ultimately be the Signs Of the Top (Facebook for WhatsApp, Apple back to prior highs, Alibaba largest IPO ever) then an EMC merger with HPQ, ORCL or IBM would certainly be one to throw on the heap.


From a 30,000 feet view, the most logical scenario to me would be for EMC to monetize a huge chunk of VMW, buy back a ton of stock, fatten up that dividend yield to north of 2.5%, and possibly make an acquisition of a smaller, more nimble tech company.  That last piece would essentially be an aqui-hire of someone the board and the outgoing/long time CEO Tucci thinks would be a great successor, with a possible new direction for the existing business as well.  By the way, this is the same plan I would offer to Yahoo (YHOO), now that the Alibaba excitement has come and gone.