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Activist Investor Will Drive EMC Stock Higher

One way or another, this stock is climbing from here

EMC Corporation (EMC) shares currently trade close to their 52-week high. The primary catalyst for the increase has been the pursuit by activist investor, Elliott Management, for EMC to spin off its VMware (VMW) division (EMC owns 80% of VMW). The reasoning behind the proposed spin-off makes short-term sense, but there is little likelihood that will happen, as the long-term prospects of combined EMC/VMW entity is better than one split apart.

EMC: Weak Stock Performance

EMC Stock Performance
Source: www.nasdaq.com

Shareholders are frustrated and they want change. EMC has lagged the S&P 500 (.INX) by a wide margin over the past two years, and that includes the recent run-up. Its dividend yield of 1.4% is below the S&P 500 average of 2.3%, meaning EMC stock has not been rewarding based on capital gains nor for income.

EMC: Federation Model

Elliott’s is staking $1 billion (~2% of outstanding shares) that EMC is worth more broken apart than together. EMC is comprised of three business banded together in what management defines as a “federation model“. They are:

  1. EMC Information Infrastructure ($18 billion in sales): This is EMC’s core business and includes the three segments: Information Storage, Information Intelligence and RSA Information Security.
  2. Pivotal ($300 million in sales): Creates “fabric” software that allows developers to combine one or more development platforms and also sells related services.
  3. VMWare ($5.1 billion in sales): Provides cloud and virtualization software and services.

EMC: Worth More In Pieces?

The idea behind fully spinning off VMW is to unlock the hidden value in the core EMC business. Recently, the core EMC Information Storage business has been under pressure with total company second-quarter earnings down 16% as costs rose faster than revenue. The segment is under pressure from cloud-based providers such as Amazon.com (AMZN), Microsoft (MSFT), Rackspace (RAX) and others who argue that moving software to the cloud will cut a company’s costs and deliver software faster than a company can update its data centers.

By fully spinning off VMware, EMC could become a takeover target for Oracle (ORCL) or others who would be better able to unlock its value. Although this makes sense in the short term, EMC has already recognized that the data management industry is changing and has made investments that created VMware and a joint venture, Pivotal, to take advantage of the cloud. The excess cash flow from the slow-growing information storage business can be used to invest in other high-growth projects while leveraging the scale and knowledge base of EMC. Arguably, VMware or Pivotal may not be able to grow as quickly without EMC’s support.

EMC: Plan For Stock To Rise

Regardless of any possible spinoff, the attention of an activist investor is a positive for all shareholders. Even if the VMware deal doesn’t make sense over the long term, the company still has options that will increase shareholder value. EMC can increase its share repurchase program, increase dividends or look to divest other assets such as EMC’s Information Intelligence or RSA Information Security segments. This would unlock value immediately and provide additional cash to funnel into high-growth projects.

Expect to see continued upward momentum in EMC stock in the near future.

As of this writing, Kenneth Fick did not hold a position in any of the aforementioned securities. Email him at kfick@piercethefog.com or follow him at www.piercethefog.com.


Article printed from InvestorPlace Media, https://investorplace.com/2014/09/emc-stock-vmware-vmw-elliott/.

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