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Threat of Fight With Activist Fund Looms Over EMC's Q3 Report

The two sides haven't yet met, sources tell Re/code.

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When the enterprise data storage company EMC reports quarterly earnings on Wednesday, it will be the first time company executives will face the public since the disclosure of a large investment by the activist investment firm Elliott Management, which wants to break the company up.

Sources close to both camps who are familiar with the situation tell Re/code that EMC executives have not yet met with representatives from the investment firm. Elliott asked EMC for a meeting last week but EMC declined, citing quiet-period rules ahead of its earnings report.

EMC CEO Joe Tucci (pictured) is described by sources as willing to meet and hear Elliott’s ideas, but as yet there has been no formal back and forth between the two companies.

Elliott is an activist hedge fund controlled by billionaire Paul Singer, and it has a tendency to use its leverage as a significant shareholder to push for changes in how a company operates. Having bought up a two percent stake in EMC worth about $1.1 billion, Elliot is now pressing EMC to spin off VMware, a software company it controls.

The investment firm’s position, according to people familiar with its thinking, is that EMC’s operations and share price have been impaired by its majority ownership of VMware and vice versa. VMware, for instance, hasn’t pursued software-defined storage in part because it conflicts with EMC’s core enterprise storage business.

The potential onset of an activist campaign to break up EMC is coinciding with Tucci’s pending retirement as CEO, now scheduled for February. EMC hasn’t yet named a successor.

And while Tucci will remain chairman, the potential for a proxy fight to change the makeup of EMC’s board will increase in the coming months, said analyst Toni Sacconaghi in a note to clients circulated Monday. EMC’s full board is up for renomination before company’s next shareholder meeting, usually held in the spring. “Elliott is likely to already have an alternative slate of directors to propose and is likely willing to engage in a proxy fight,” Sacconaghi wrote.

The board, he wrote, is said to be supportive of Tucci’s long-term vision. Sources familiar with EMC’s thinking say the company’s executives view the notion of spinning off VMware as mostly an “interesting spreadsheet exercise” and aimed at short-term gains. Tucci has sought to sketch out a longer-term vision, arguing that EMC and VMware are stronger together than apart.

But given EMC’s performance — in a three-year period when the S&P 500 rose 52 percent, EMC shares rose only one percent — there’s likely to be, Sacconaghi said, “meaningful shareholder support” for Elliott’s approach.

As for the quarter: Analysts expect EMC to report a profit of 43 cents a share on revenue of about $5.8 billion. In April, the company disappointed shareholders with the news that it expected to finish the year with a smaller profit than had been expected. Where analysts called for a full-year profit of $1.94 a share, EMC said on April 23 that it expected $1.90. EMC shares have increased by more than 13 percent this year.

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