Breakup Mania: EMC Is Back In The Hot Seat, While Analysts Eye Cisco, Too

With activist investors successfully getting two huge tech companies to chop themselves apart, HP and eBay, breakup mania has hit the tech industry. Now, eyes are turning once again to EMC.

Investor Elliott Management, headed by Paul Singer, has made a public call for the computer storage giant to spin off its hot-and-profitable subsidiary, VMware.

EMC owns 90% of VMware, a publically traded enterprise software company valued at about $US40 billion. VMware’s main product helps computer servers run more efficiently. The company has since expanded into software for cloud computing, networking, and storage.

“Both EMC and VMware have grown and are now competing against one another, confusing customers, employees, Street analysts and shareholders,” Elliott’s letter argues.

The letter also expresses concern for EMC’s ability to manage its “federation” structure after CEO Joe Tucci retires. EMC owns other business units that run almost independently, including security company RSA and cloud-computing company Pivotal.

And it delves into how poorly EMC’s stock has performed when backing out the value of these subsidiaries.

“Investors are getting core EMC ($16B sales, 20% Op margins, $US1.35 EPS) for FREE,” according to Wall Street Analyst RBC Capital Markets.

EMC published a public statement in response, saying, “Over the past few months, EMC’s leadership has met with representatives of Elliott several times and has listened carefully to their ideas, as we do with all of our shareholders.”

EMC was reportedly in advanced mega-merger talks with HP, which may or may not be dead and which CEO Meg Whitman would not confirm or deny. It all adds up to a strong tail wind for an EMC breakup.

Meanwhile, there’s been some chatter over whether Cisco, who’s stock has languished below $US30 for years, could do better by breaking up, too.

RBC Capital laid out a case for splitting Cisco in half, too, with its routing/switching business becoming one company and its cloud computing/Internet of Things and other growth areas making up the other half, reports Barron’s.

That’s an interesting idea, but doesn’t have the weight of a big activist shareholder behind it. And not every Wall Street analyst buys the idea. Citibank analyst Ehud Gelblum issued a report that says Cisco is more valuable whole.

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