NFV Strategies

VMware May Buy Its Parent EMC – Report

Facing pressure from activist investors, EMC is considering being acquired by its own subsidiary, VMware, according to a report.

EMC Corp. (NYSE: EMC), which specializes in data storage and IT, is a majority owner of VMware Inc. (NYSE: VMW). The reverse-takeover -- in which the child swallows the parent -- is "one of several options EMC's board is exploring as part of a wide-ranging strategic review of its operations and as a partial response to pressure from an activist shareholder," according to Re/code, which attributes its report to "sources briefed on the discussions."

Re/code described the maneuver as a "downstream merger."

EMC has also explored selling to HP Inc. (NYSE: HPQ) and Cisco Systems Inc. (Nasdaq: CSCO), acquiring other companies and selling assets, Re/code says.

Earlier this week, Re/code speculated that EMC might buy out its remaining stake in VMware, in which EMC has 80% ownership.

Activist fund Elliott Management supports the downstream merger, Re/code says. Elliott owns a bit more than 2% of EMC and participated in installing two new EMC board members earlier this year. Elliott previously public pressured EMC to "divest its stake in VMware, arguing that the investment has left the parent undervalued and has caused the two companies to compete." Elliott would also oppose EMC buying out VMware entirely, Re/code says.

The combined companies would likely save on operational costs, Re/code reports, citing one analyst who said the combination could reduce costs by up to $946 million in 2016.

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EMC and VMware spokespeople declined to comment on the reports. Elliott had not yet responded at press time to a query from Light Reading.

VMware is still only a small player on the network operations side of communications service providers, but it has big ambitions, fueled by its presence in IT, both in communications providers and other enterprises. The company is building its NFV business as a means of winning communications providers. (See VMware Looks to NFV to Crack SP Market.)

NFV is crucial to the New IP. By virtualizing functions now performed in dedicated appliances -- such as firewalls, VPN and load balancing -- communications providers can cut costs and improve innovation and agility, converting networks from cost centers to profit centers.

VMware CEO Pat Gelsinger outlined the company's service provider strategy in an interview with Heavy Reading at Mobile World Congress this year:

Elliott has a history of shaking things up in the networking sector. The investment company got into a spectacular donnybrook with Juniper Networks Inc. (NYSE: JNPR), which resulted in Juniper changing CEOs and realigning in early 2014. (See Juniper Bows to Investor Pressure, Refocuses.)

Juniper, like VMware, is now looking to NFV for communications provider growth. (See Juniper Looks to NFV for Growth.)

And Elliott also has its eyes on Alcatel-Lucent (NYSE: ALU), recently acquiring a 1% stake in that company as AlcaLu eyes acquisition by Nokia Corp. (NYSE: NOK). (See Eurobites: Activist Investor Takes Stake in AlcaLu.)

— Mitch Wagner, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profileFollow me on Facebook, West Coast Bureau Chief, Light Reading. Got a tip about SDN or NFV? Send it to [email protected]

Mitch Wagner 8/7/2015 | 10:15:06 AM
Re: This is an interesting maneuver... mhhf1ve - There are some examples cited in the Wall Street Journal article linked to above. Seagate did a complicated three-way maneuver involving a reverse takeover. 

It makes sense in VMware's case. VMware is growing, unlike the rest of EMC's business. EMC CEO Joe Tucci is near retirement, and VMware CEO Pat Gelsinger is rumored as a possible replacement. 
mhhf1ve 8/6/2015 | 5:25:19 PM
This is an interesting maneuver... I wonder how often this happens... a subsidiary company buying its parent company? Any other prominent examples of this come to mind? Doesn't the parent company usually try to sell off the subsidiary and try to pivot with the selloff money?
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