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EMC Is Considering a Buyout by VMware

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Speculation is rife about EMC buyout by its own subsidiary

On August 5, 2015, EMC (EMC) made headlines due to a possible buyout by VMware (VMW)according to Re/code’s Arik Hesseldahl. This speculation isn’t new, as EMC has been reeling under pressure from Elliott Management, headed by Paul Singer, to consider a split.

In the recent past, EMC has considered being bought by Hewlett-Packard (HPQ). Oracle (ORCL) and Cisco (CSCO) were also suggested as potential suitors for EMC by industry analysts.

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Before this news made the headlines, EMC considered buying out the remaining 20% in VMware. EMC owns a 80% stake in VMware. If VMware finally agrees to buy out EMC, it would be a “downstream merger,” in which a partially owned subsidiary buys out the parent company. We’ll discuss this in more detail in the next part of the series.

EMC’s business model

Elliott Management, an activist investment firm, took a $1 billion stake worth ~2% in EMC in 2014, with the likely intention to urge EMC to spin off its 80% share in VMware. Under its structure, EMC, VMware, Pivotal, VCE, and RSA Security are all independent businesses that function together as a corporate entity. The companies include:

  • EMC, an information infrastructure provider
  • VMware, a virtualization company that pioneered the concept
  • Pivotal, a software and analytics platform provider
  • VCE, formed in 2009, is a converged infrastructure company. VCE is a joint venture of Cisco and EMC. VCE also held minority investments from VMware and Intel (INTC).
  • RSA, a security firm

If you’re bullish about EMC’s stock, you could invest in the Technology Select Sector SPDR Fund (XLK). The ETF invests about ~1.27% of its holdings in EMC.

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