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VMware and EMC: An Uneasy Partnership

So, EMC is spinning off VMware. Or not. Instead, it could fully integrate VMware. Or maybe it's the other way around -- perhaps VMware will buy out its parent company, and absorb EMC. Or not.

Welcome to the wild, wacky world of Elliott Management. Elliott is known for its hyper-aggressive strategy of getting a stake in a company, suggesting lots of changes to increase "shareholder value," then taking further -- often drastic -- steps to implement those changes.

Under Pressure
And, according to Re/code's Arik Hesseldahl, the latest buzz is that EMC is considering the benefits of being purchased by its own subsidiary. The deliberations are part of a "partial response to pressure" from Elliott, Hesseldahl writes.

The idea of EMC selling off VMware, which it purchased in 2003, has floated around the virtualization industry for years. The businesses are very different, while also having some commonalities. EMC focuses on storage, while VMware's core concern is datacenter virtualization and management.

Both companies, however, have significantly broadened their technology portfolios over the years: in addition to VMware, EMC owns security giant RSA, and data analysis company Pivotal (run by former VMware CEO Paul Maritz). VMware is now heavily invested in cloud computing and mobile device management, as well as hyperconvergence with its EVO:RAIL appliances. Elliott often sees diversification as a negative, complaining that companies can lose the focus that made them successful in the first place.

A Downstream Merger?
The idea of VMware buying out EMC is much newer. That would be what's called a "downstream merger," Hesseldahl reports: "In this instance, VMware would issue new shares in exchange for EMC shares in combination with cash raised from the issuance of new debt."

If that occurred, any moves VMware would take with a company as large as EMC is pure speculation. VMware is pushing heavily into software-defined storage (SDS) as part of its overall strategy of the "software-defined datacenter," or SDDC, which attendees to VMworld later this month will undoubtedly hear much more about. EMC is more of a traditional storage company, so an integration of its products into new VMware offerings could be exceptionally complex and difficult.

Competition vs. Integration
Another problem is that the two companies now compete against one another in several areas, including cloud infrastructure. Can a company divided against itself stand? That's another critical issue to be resolved, whether or not one buys out the other. For the sake of simplicity, it would be better for EMC to simply sell off VMware, which is why that's been the most-predicted outcome over the years.

If an assimilation occurs (either way), another significant hurdle would be how to integrate the two different corporate cultures. VMware has always operated independent of EMC, for the most part; it's been a point of pride for VMware, in fact. I'd argue it was necessary, too, since VMware understands the virtualization market better than anyone, and having EMC interfere would lead to nothing but negative outcomes. Would both companies suffer if they were fully integrated? It's certainly a possibility.

Game of Thrones
At this point, no one knows how this will all shake out. Elliott is good at getting what it wants, and right now it appears to want the status quo to go away. Will VMware and EMC be able to resist Elliott's suggestions? Do they even want to? Or is Elliott's intrusion the justification the companies have been seeking to go in a completely different direction?

One thing is sure: It will be fascinating to watch this all play out. What's your take? Should the companies separate, or should one buy out the other? Let me know in the comments section.

Posted by Keith Ward on 08/07/2015 at 9:39 AM


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