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The Future of the EMC Federation

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You’ve probably noticed a lot of talk recently about the future of the EMC Federation. It owns 80% of VMware, along with Pivotal, Virtustream and the “classic” EMC business.

Elliott Management, a hedge fund that owns about 2% of EMC’s shares, Virtually Speaking is pushing for the two companies to go their separate ways.

The reason speculation is reaching fever pitch is that Elliott and EMC reached a standstill agreement at the start of the year, but that expired in September. So VMware is back in play.

Elliott seems to be arguing that EMC shares are undervalued. By divesting itself of VMware, EMC shares’ true worth would become apparent it believes.

To get things in perspective, the market currently values EMC at around $44 billion, and VMware at roughly three quarters of that, at $33 billion. That means EMC’s roughly 80% stake in VMware is worth – on paper – about $26bn.

If EMC does sell its VMware shares then there’s the possibility that VMware becomes an independent company. Or it could be acquired by someone else. There’s also the possibility that EMC could itself be acquired: the story going round last year was that EMC was trying to sell itself to HP, and there are certainly other big companies that would be interested in it (like, perhaps, Dell?), with or without VMware.

There has also been some talk of a reverse takeover — VMware buying EMC.

These market shenanigans are all well and good, but what about VMware customers? Would they be better off if the link with EMC was severed? Or should they be worried?

EMC thinks the two companies should stick together. David Goulden, CEO of the EMC part of the Federation, says that big companies of the sort that tend to be VMware customers are looking for fewer strategic partners, so splitting VMware from EMC would be “swimming against the tide.”

Synergies Make VMware and EMC Better Together

He adds that there are synergies from having the two companies being strong together that are worth at least $1 billion per year.

Splitting up the Federation is not something that EMC Federation CEO Joe Tucci wants to see either. In a July earnings call he said: “…I think splitting this federation or spinning off VMware is not a good idea. I firmly believe that we are better together, a lot better together.”

Sound familiar? Better together is also VMware’s mantra about server virtualization and containers: “We (VMware) see containers and virtual machines as technologies that function better together,” is how VMware’s Kit Kolbert put it last year.

And that brings us back to VMware customers. Public companies have a duty to their shareholders, not to their customers. So when VMware talks about “better together,” it’s not clear that it means “better together for customers.”

Ask yourself this. Who benefits if containers are used together with VMware’s virtualization technology? VMware? Certainly. VMware customers? That’s not so clear cut.

More to the point, who stands to benefit if the Federation stays together? The Federation itself? Probably. Customers? Difficult to say.

Fortunately, we may not have to puzzle this out. That’s because the link between the two companies is likely to become increasingly untenable. Why? Because VMware has moved too far beyond what it was when it was acquired by EMC in 2004.

Back then it was a server virtualization company. Now it’s about the cloud, networking, storage, software-defined everything. What’s happening is that VMware is moving at high speed towards the future, while EMC’s traditional storage business is moving at a much slower pace. What’s likely is that those synergies that Goulden talked about — if they exist at all — will get less and less valuable over time.

So VMware might be spun off as an independent company. It may be acquired by another company. It may even turn around and buy the Federation that currently owns it.

But probably it will continue to grow, and eventually it will just become the Federation.

Paul Rubens is a technology journalist and contributor to ServerWatch, EnterpriseNetworkingPlanet and EnterpriseMobileToday. He has also covered technology for international newspapers and magazines including The Economist and The Financial Times since 1991.

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