Activist investor Elliott Management Corp has taken a $1 billion stake in EMC Corp (EMC.N) and plans to push it to spin off virtualization software unit VMware Inc (VMW.N), the Wall Street Journal reported, citing people familiar with the matter.
EMC shares were up about 4 percent at $28.05 on Monday afternoon after touching a two-year high of $28.31 earlier on the New York Stock Exchange. VMware shares were down 1.6 percent at $93.75.
Elliott, which would now be EMC's fifth-largest shareholder, is expected to argue that the company's present structure has hampered stock performance, the Journal said. (on.wsj.com/1sCyN6t)
Officials of the hedge fund, which called EMC to inform it of the investment, plan to meet Chairman and CEO Joe Tucci, the report said.
Representatives of EMC and Elliot Management did not respond to requests for comment.
A spin-off was unlikely, as EMC regards VMware as a major strategic asset, but EMC could hike its dividend or buy back more shares, Janney Capital Markets analysts wrote in a note on Monday.
EMC, which owns about 80 percent of VMware, had bought the company in 2004 for $700 million. VMware accounted for about 22 percent of EMC's 2013 revenue of $23.2 billion and about three-fourth of its market value of $57.3 billion, as of Friday.
EMC's "federation strategy" comprises three businesses: EMC Information Infrastructure — its core data-storage unit and security firm RSA Information Security, VMware, and cloud-computing software maker Pivotal.
EMC's and VMware's data analytics and cloud application software assets were merged last year to create Pivotal, with plans to eventually take it public. (reut.rs/1yQn5FM)
"Clearly 'core' EMC is cheap and there is value to be unlocked," Brian Marshall, an analyst with brokerage ISI Group, said in a note.
"We guess EMC will try to appease Elliott by spinning more VMware off to EMC holders and the use of proceeds will go to accelerated EMC buybacks."
Marshall also said the EMC management was likely to be "adamant" against Elliott's proposal.
Elliott has earlier bought stakes in technology companies such as Juniper Networks Inc (JNPR.N), Riverbed Technology Inc RVBD.O and Brocade Communications Systems Inc (BRCD.O) and pushed managements for changes to benefit shareholders.
EMC's core trades at a discount to other leading tech names and its sum-of-the-parts valuation of $35 per share is materially higher than its current valuation, BMO Capital Markets analyst Keith Bachman said.
VMware is scheduled to report second-quarter results on Tuesday after markets close, while EMC is expected to report results before markets open on Wednesday.
(Reporting by Soham Chatterjee and Arnab Sen in Bangalore; Editing by Gopakumar Warrier)