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Oaktree Capital Lets Go of EMC

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Oaktree Capital sells its stake in EMC

According to a recent 13F filing, Oaktree Capital sold its entire stake in EMC (EMC), which consisted of 610,000 shares. EMC is a 0.28% part of the iShares Russell 1000 ETF (IWB).

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Overview of EMC

EMC assists service providers and businesses achieve operational transformation by delivering “Information technology as a service, or ITaaS.” Cloud computing is the basis for this transformation. EMC, via innovative services and products, seeks to accelerate the adoption of cloud computing. EMC assists IT departments manage, store, analyze, and protect information in an agile and cost-effective manner. The company operates in three segments:

  1. VMware Virtual Infrastructure
  2. Pivotal
  3. EMC Information Infrastructure

4Q14 financial results in line with estimates

EMC posted 4Q14 revenue of $7.05 billion and non-GAAP (generally accepted accounting principles) EPS (earnings per share) of $0.69. These results represent year-over-year growth of 5% and 15%, respectively.

Information Infrastructure revenue was $5.3 billion, a 2% increase compared to the same period a year ago. VMware posted revenues of $1.69 billion, and Pivotal, $0.07 billion. These results represent year-over-year increases of 16% and 18%, respectively.

EMC trades at price-to-book ratio of 2.3x. In comparison, Western Digital (WDC) has a price-to-book ratio of 2.4, Seagate Technology (STX) has a price-to-book ratio of 4.7x, and SanDisk (SNDK) has a price-to-book ratio of 2.1x.

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EMC doesn’t intend to spin off VMware

Activist investor Elliott Management suggested that the firm spin off VMware and use the proceeds to repurchase EMC stock. However, Needham strongly argued against the idea.

There is a high level of technical integration between EMC and VMware. VMware’s faster rate of growth benefits EMC. And, according to Needham, EMC’s stake in the virtualization player makes sure that VMware benefits from the movement of data centers toward software-defined architectures. Divesting VMware would leave EMC a low-growth player that would have to depend on cash balances to purchase valuable entities. As a result, EMC’s decision to refrain from spinning off its stake in VMware bodes well for the company.

Returns to shareholders

In 2014, EMC returned $3.9 billion to its shareholders. It repurchased $3 billion of stock and paid $900 million in dividends. In 4Q14, it repurchased $1.6 billion in shares and paid $240 million in dividends. On March 2, it declared a quarterly dividend of $0.115 per share.

In the next part of this series, we’ll review Oaktree Capital’s sale of its shares in Telefonica Brasil (VIV).

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