Major shareholder pushes EMC to split its businesses

A major shareholder in EMC Corp. is pushing the Hopkinton-based data- storage giant to break up its business and consider merger and acquisition opportunities with other large technology companies.

Elliott Management, a New York City hedge fund, said in a letter to EMC’s board of directors Wednesday that the company should spin off its VMware software unit — following through on reports in July that the fund, which is known as an activist investor, would lobby for a split after accumulating more than $1 billion in EMC stock.

But Elliott’s suggestion that EMC join forces with another high-tech player is a new position that adds fuel to ongoing speculation in the industry that EMC could unite with rival Hewlett-Packard through a merger or by one company buying some or all of the other.

The two have reportedly been in talks for about a year, with progress on a deal having stalled in September.

HP, based in Palo Alto, Calif., announced a breakup of its own on Monday, saying it will form two companies: one for personal computers and printers and another for enterprise software products and services.

The move is widely considered by analysts to enhance the prospect of a marriage with EMC, which probably would not be interested in the computers and printers business. Elliott, which owns 2.2 percent of EMC, did not mention HP by name in its letter, noting that multiple suitors could exist.

“An acquisition of EMC by any of these buyers would create the leading enterprise IT company in the world,” wrote Jesse Cohn, a portfolio manager for Elliott. “It would be a highly attractive outcome for both the acquiring company and EMC, as well as for the combined company’s shareholders.”

In a statement, EMC said it values Elliott’s input but gave little indication it will abandon its federation strategy, in which its units operate autonomously under a big corporate umbrella.

“EMC regularly hears from customers and partners, around the world, strong expressions of support for its strategy as well as ability to serve their evolving range of needs in a rapidly changing and complex IT marketplace,” the company said.

The hedge fund’s argument for an EMC-VMware split is based on a belief that the two brands, which already trade separately on the New York Stock Exchange, are now competing with one another in the virtual storage space.

VMware’s growth — its current market value of roughly $40 billion is more than 60 times greater than its sale price to EMC in 2004 — has pulled away investors who might otherwise buy EMC stock, Elliott contends.

Other large tech companies have recently decided to spin off major units or are seriously considering such moves. The online retailer eBay said in September that it would divorce itself from the electronic payments processor PayPal, forming two separate companies next year. Software maker Symantec is reportedly mulling the division of its security and data-storage businesses.

“These developments speak to the growing pressures and growth challenges that mature technology stalwarts are facing in today’s evolving technology landscape,” said Daniel Ives, an analyst at FBR Capital Markets & Co. “In the current technology environment, shareholder pressure and activism are having an increasingly strong impact.”