What Lies Ahead For The Rumored EMC Corporation (NYSE:EMC)-VMware, Inc. (NYSE:VMW) Integration?
EMC Corporation (NYSE:EMC) is considering a scenario where it would be acquired by VMware, Inc. (NYSE:VMW) in a downstream merger. The other option is that EMC could buy back VMware. Regardless of the approach pursued, it seems the idea is to combine the companies. But what will really happen in the end?
It has not been easy for EMC Corporation (NYSE:EMC) trying to sell storage solutions the old-fashion way. For that matter, the company has been trying to embrace a cloud offering model, but there remains more work to be done on that front. With the virtualization market maturing, VMware is also looking to cloud with storage, security and other offerings for new growth. Proponents of the combination of EMC and VMware say it would lead to significant cost-savings and accelerate the go-to-market.
$850 million in cost-savings
According to Wells Fargo & Co (NYSE:WFC), a merger between EMC Corporation (NYSE:EMC) and VMware would lead to about $850 million in annual cost-savings as the companies eliminate duplicate costs.
However, the journey of combining EMC and VMware could be long and costly, eventually diluting whatever benefits are being pursued. Additionally, the cool off agreement between the management of EMC and Elliott Management is coming to an end, which could see more activism regarding the stake in VMware.
The business landscape is changing fast for both EMC and VMware. As such, the companies would need to settle their union quickly enough to avoid lagging behind rivals. However, it doesn’t look like EMC and VMware can integrate quickly to avoid disruption that could deny them the value propositions they intend to secure by coming together.
In case of a troubled integration, the combined entity of EMC and VMware may never catch up with rivals Amazon.com, Inc. (NASDAQ:AMZN) and Microsoft Corporation (NASDAQ:MSFT) in the cloud.
Besides a challenging integration, Elliott Management also looms large. The activist investor has time and again called on the management of EMC Corporation (NYSE:EMC) to completely spin off VMware. EMC owns 80% of VMware. Only a standstill agreement cooled the agitation for the VMware spinoff. As such, EMC will have the uphill task of convincing Elliott that the downstream merger with VMware is important in creating more shareholder value.
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