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Good way to go

23 September 2014 By Robert Cyran

EMC’s longtime boss Joe Tucci is scheduled to step down early next year. He has delayed retirement before, but he can’t put it off forever. So what will happen to the three-part “federation” he assembled once he leaves? The market doesn’t put full value on the company’s bits – creating a $13 billion gap between its theoretical worth and its $61 billion market capitalization. If rivals Hewlett-Packard, Oracle or Cisco won’t purchase the whole at an attractive price, a breakup would ensure his financial legacy.

The Massachusetts-based tech group is best known for its large storage business, but buying VMware for $625 million a decade ago was one of the cleverest things Tucci did. The parent later floated part of the server and network virtualization firm on the market. VMware is now valued at more than $41 billion, meaning EMC’s current 80 percent stake is worth about $33 billion.

EMC hopes its fast-growing cloud software company Pivotal might eventually do as well. Today, its majority ownership is worth perhaps $1.5 billion, based on rivals’ valuations. Add $2 billion in net cash, and that means the market values EMC’s remaining business at about $24 billion, or about nine times estimated earnings this year.

That’s a bargain. Rival NetApp, which is a weaker, smaller company in storage, trades at about 14 times estimated 2014 earnings. Put EMC on a similar valuation, and its core businesses would be worth about $37 billion.

Add it all up, and EMC’s parts are worth perhaps $74 billion. Rivals are well aware of this conglomerate discount. That helps explain why HP seriously mulled a takeover of EMC – despite understandable shareholder anger at HP’s history of value destructive deals. Rivals Oracle or Cisco might be similarly tempted to do a deal.

Even if EMC can’t find a suitor, there’s always the option of splitting up the company. Tucci may prefer to keep his creation whole. But a potential $13 billion gain in EMC’s value gives him options that don’t include selling out to a serial M&A destroyer.


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