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Make it Dell’s problem

12 Oct 2015 By Robert Cyran

Investors in EMC have received a $67 billion ticket out of trouble. Michael Dell, his company, private equity firm Silver Lake and others are paying $33.15 a share, by their reckoning, for the data storage-based tech conglomerate. Most of the premium on offer comes as a flaky tracking stock in EMC subsidiary VMware. But the deal beats the feasible alternatives.

EMC’s self-styled “federation” of businesses is a mishmash. Its core enterprise storage unit’s revenue grew 19 percent in 2010. In the most recent quarter, though, the top-line growth was only 1 percent from a year earlier. Server virtualization firm VMware is doing better, which is why EMC’s roughly 80 percent stake accounts for almost half its market capitalization. Cloud-software unit Pivotal is promising, but young and tiny.

Investors including activist fund Elliott Management have expressed skepticism that EMC’s bosses can run all of these units well, and the company has been plagued by a conglomerate discount. The parts might be worth $35 to $38 per share separately, according to FBR & Co, against an average closing stock price last month of a hair above $24.

That breakup tally is higher than the Dell offer, more so after discounting the headline value for the fall in VMware’s stock price since the headline price was calculated and because a tracking stock, which reflects an indirect interest and raises legal risks, is likely to trade at a discount. But even an offer worth, say, $30 a share would probably compare favorably given the risks involved in splitting up EMC, which would take months with success far from assured.

It’s also hard to see other companies paying up for EMC. Some have already passed. Meanwhile, Dell’s target has also proved unable to engineer succession at the top, with longtime boss Joe Tucci still in situ after postponing his retirement several times.

All this presumably explains why Elliott has gone public in support of the sale to Dell. Even if the ersatz VMware paper isn’t worth as much as Dell says, the cash component alone is about equal to EMC’s undisturbed stock price. Throw in the tracking stock, and much of EMC’s conglomerate discount goes away. In a business that’s on the verge of turning down, investors should take the money and run.



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