EMC facing $10bn test to prevent calls for a breakup

EMC needs to convince investors that keeping the company together is worth more than the estimated $10bn (€7.4bn) that could be unlocked in a breakup.

Activist investor Elliott Management has built a stake in EMC and is pushing the $58bn firm to spin off its publicly traded VMware software unit.

While the average of five analysts’ estimates signals a breakup could unlock over $10bn in shareholder value, Royal Bank of Canada said management has a point in arguing that a split would weaken the parts and harm growth.

“This looks good on paper, but because of the strategic value of that asset, it might not be that practical to spin it off or sell it,” Rajesh Ghai, a New York-based analyst at Macquarie Group said. “There are reasons why EMC is structured this way.”

EMC needs to do something to boost its stock price, according to Cantor Fitzgerald. The shares climbed just 1% in the three years before reports of Elliott’s stake, compared with a 52% rally for the Standard & Poor’s 500 Index.

The content management and security divisions are less integral to EMC, which makes storage computers, and spinning off those assets is an alternative that could create $5bn for shareholders, said Macquarie.

Or EMC could consider more share repurchases or dividends, said Janney Montgomery Scott.

Elliott has accumulated over $1bn in EMC stock, said a source. Splitting with VMware could make EMC an attractive take- over target for technology giants including Oracle, said the person.

While the firm’s primary information storage business has been under pressure as more businesses shift to cloud storage, the unit is worth more than shareholders are giving it credit for, said Brian Alexander of Raymond James Financial. Investors are “not really valuing EMC on a sum-of-the- parts basis because they haven’t had a reason to,” he said. Using a breakup to highlight “the valuation of core EMC, which we would argue is very depressed, makes a lot of sense to us”.

EMC’s core business is valued at about 7.8 times estimates for earnings per share over the next year, Bill Choi of Janney wrote in a report yesterday. That’s almost half the multiple of pure-play rival NetApp, he said.

On average, analysts estimated that a breakup would boost EMC’s share price to as much as $33.60, 19% more than yesterday’s close. That equates to about $10.8bn, data shows.

But Amit Daryanani, an analyst at RBC Capital Markets, a unit of Royal Bank of Canada, said severing the ties between EMC and VMware risks undermining expansion at both businesses.


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