Courtesy of Benzinga.
Shares of VMware, Inc. (NYSE: VMW) were up more than 1.5 percent on Monday, following a re/code article that argues that EMC Corporation (NYSE: EMC) may soon buy out the company, rather than spin it out.
According to the report, EMC has been pressured by Paul Singer’s Elliott Management, a hedge fund with “a history of using its ownership positions to push companies for changes, to break up. Last fall it argued in an open letter to shareholders that EMC should spin out VMware — of which it owns a stake amounting to about 80 percent — as a way of boosting the overall value of the two companies.”
However, the IT and storage company has resisted this idea. A few months ago, CEO Joe Tucci said the companies worked better together than apart.
Furthermore, last month, Tucci told investors that EMC could save up to $1 billion a year if it got aligned “tightly” with VMware. “Many took that as a hint that EMC’s board is studying a spin-in,” re/code said.
“It makes sense for a variety of reasons,” author Arik Hesseldahl stated. “As Elliott Management has pointed out as VMware has grown, its business in some places overlaps and even competes with that of its parent. Tucci has defended this ‘no seams’ approach, saying it prevents would-be competitors from squeezing through openings.”
A few other benefits from a spin-off would include EPS accretion for EMC (which could see its EPS increase by $0.40 to $0.50) and the end of the unusual operational structure Tucci assembled.
Where does the spin-off option stand in this thesis?
The article’s author thinks this seems less likely, since “EMC would emerge weaker than before. Daryani says in an EMC-minus-VMware scenario leaves the parent with a value of about $11 a share, or less than half what it’s trading for now.”
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