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Dell Saves EMC from Elliott Management’s Shareholder Activism

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Oct. 15 2015, Updated 9:06 p.m. ET

Dell saves EMC from conflict with Elliott

In the previous part of the series, we discussed the synergies the Dell-EMC merger will bring to Dell. The deal comes amid difficult times for both companies and has been a lifesaver for EMC. EMC was being pressured by Elliott Management, which owns a 2.2% stake in the firm, to split the company and spin off VMware (VMW).

According to Elliott, the individual units are worth more than the EMC Federation as a whole and would unlock shareholder value, whereas EMC wanted to retain the federation model, which offers complete enterprise storage solutions. The Dell merger relieved EMC from this shareholder activism. The merger may not split EMC, as Dell looks to become the largest integrated technology provider, which is possible through the federation model.

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Troubled times for EMC

As seen in the above graph, EMC’s revenue growth has slowed due to the commoditization of computing hardware. Cloud services such as Amazon Web Services (AMZN) and the availability of free software such as Hadoop, which can be run on commodity servers, reduced the demand for EMC’s specialized and costly storage solutions. In response to this competition, EMC resorted to aggressive expansion in the cloud sector and acquired four cloud startups, namely TwinStrata, Maginatics, Spanning, and Cloudscaling, in 2014.

However, succumbing to the pressure from Elliott Management, EMC started exploring various options, including a buyout by VMware (VMW). EMC also announced its intention to cut costs by $850 million, indicating mass layoffs.

Go-shop clause

When Dell’s offer was received, EMC asked for a “go-shop” clause, which gives it 60 days to seek competing offers from other potential suitors. The company wanted the clause to ensure it gets the best deal for its shareholders and to prevent a conflict with its shareholder Elliott Management.

Sources told Reuters that Oracle (ORCL), IBM (IBM), and Cisco (CSCO) are other potential suitors. However, the chances of them challenging Dell’s bid are bleak. Elliott Management stated that the merger with Dell at a 28% premium was the best outcome for EMC shareholders.

You can invest in VMware through the Vanguard Extended Market ETF (VXF), which has a 0.16% exposure in the company’s stock.

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