Why Elliott Management builds up stake in EMC

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Elliott Management

EMC (EMC) shares have rallied recently on news that Paul Singer’s activist hedge fund Elliott Management has accumulated a stake worth over $1 billion in the storage giant. According to unconfirmed reports, the fund expects to create value by splitting up the company and selling its parts, including its stake in its listed cloud and virtualization software unit VMware (VMW). Newswires noted that the hedge fund confirmed the stake in its second quarter investor letter and said that it’s “looking forward to a dialogue with EMC to discuss ways to create additional value for shareholders.” The reports added that Elliott owns around a 2% stake in EMC. It’s currently the fifth largest shareholder.

EMC shares

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A report in The Wall Street Journal last week cited persons familiar with the situation said that the New-York based activist fund could push EMC to separate VMware because it believes the company is undervalued due to the current “EMC Federation” structure. The report noted that after the separation of VMware, Elliott will seek buyers for the whole or parts of EMC, adding that interested buyers could include Oracle Corp. (ORCL), Cisco Systems Inc. (CSCO), and Hewlett-Packard (HPQ).

EMC, which has a $60 billion market cap, is a leading provider of IT storage hardware solutions that promote data backup, recovery, and a smooth transition to cloud computing. The company manages its business as three federated businesses, each of which plays a role in the delivery of  information technology as a service (or ITaaS). The EMC Federation consists of EMC Information Infrastructure (or EMCii), Pivotal, and VMware Virtual Infrastructure. EMCii operates in three further segments namely Information Storage, Information Intelligence Group, and RSA Information Security.

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EMC owns an 80% stake in VMWare. Pivotal, which is a big data and cloud computing company, is a joint venture of EMC and VMware. General Electric (GE) also owns a minority stake in Pivotal. On EMC’s latest earnings call, CEO Joe Tucci said, “We haven’t heard from Elliott Management other than their call to us saying that they’re, or intend to be, one of EMC’s larger investors.” He also said that he agreed “EMC is undervalued,” but spinning off “strategic asset” VMware may not be successful.

Founded in 1977, Elliott manages ~$24 billion in assets. A report in Reuters cited the fund’s latest 2Q14 investor letter and said during the first half of 2014, the Elliott Associates portfolio increased 4.6% while the Elliott International Limited fund increased 4.1%. Elliott’s other technology targets include Juniper Networks, Riverbed Technology, Emulex, Compuware, Brocade, and NetApp. The fund is reported to have added to its stake in Juniper Networks (or JNPR) in 2Q14. Elliot also owns a 10.5% stake in the network equipment maker Riverbed (or RVBD), which has twice rebuffed the hedge fund’s takeover offer earlier this year.

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