Elliott Management Further Details Its Position On EMC Corporation, VMware, Inc. In New Letter

On Wednesday, Elliott Management wrote a letter to EMC Corporation's EMC board of directors and company CEO Joe Tucci. Elliot Management owns 2.2 percent of the common stock of EMC, making the activist firm one of the largest shareholders.

In the letter, Elliott Management states that EMC's current structure "obscures enormous value at EMC" and that the company "should pursue pathways to recognize this value, including a separation of VMware, Inc. VMW from Core EMC and/or various M&A opportunities."

Elliott Management states that it spent the better of a year, including discussions with more than 580 EMC and VMware customers to better understand the company's competitive position. The investment firm also retained consulted with senior executives in the storage, data center virtualization and broader technology marketplaces.

Related Link: Elliott Offers Letter to EMC's Board: Proposing Spinoff of VMware

Elliott Management believes that the company's executive structure is “unusual” and "unorthodox" as the company evolved drastically over the prior 10 years. The investment firm states that EMC's structure is not properly positioned “for today or for the future" given that "much has changed since 2004, when VMware was solely a server virtualization company and EMC was primarily selling high-end storage arrays."

EMC's stock price has "deeply under-performed its proxy peers" according to Elliott Management due to the company's "unusual corporate structure" and the "damaging" and "significantly undervalued" Core EMC.

"Pior to the disclosure of Elliott's position in EMC on July 21, 2014, Core EMC traded at just ~3x 2015E EBITDA and ~8x 2015E P/E," Elliott Management explained in its letter. "Those metrics are incredibly cheap on any basis but especially so when you consider that NetApp, Core EMC's closest peer, currently trades at ~6x 2015E EBITDA and ~13x 2015E P/E, a premium to Core EMC of ~80% and ~70%, respectively. This is even despite the fact that Core EMC is the market leader in storage with such attractive assets as VNX, Data Domain, Isilon, XtremIO, RSA and Pivotal (all of which are included in Core EMC). Core EMC, if it traded as a standalone company, would undoubtedly trade at a premium to NetApp."

Elliott Management believes that a tax-free spin-off of all of VMware from EMC would create "financial and operational benefits that are extremely meaningful."