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Nothing May Change at EMC Except Its CEO

Too big to buy, storage giant EMC is more likely to stay independent.

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Storage and IT giant EMC recently explored the possibility of a blockbuster merger with a slew of possible suitors that included Hewlett-Packard, Oracle, Dell and Cisco Systems, but it turns out none of them are likely to pass.

HP was more interested in getting its hands on VMware — the cloud software company of which EMC is a majority shareholder — and they couldn’t agree on a deal premium. Oracle’s not interested either, sources familiar with that company’s plans tell Re/code.

Cisco CEO John Chambers today poured cold water on speculation that EMC’s endgame was to lure his company into merger talks. In remarks at a Wall Street Journal event today, Reuters quoted Chambers as saying, “If Joe and I were going to do something here, we would have done it a year or two ago.” EMC shares fell less than one percent.

Chambers was referring to Joe Tucci, EMC’s CEO since 2001 who is due for retirement in early 2015. EMC has yet to tap a successor. (More on that in a moment.)

EMC has been targeted by the activist investor fund Elliott Management in recent months. The firm argues EMC should be broken up in order to boost value for shareholders, and that its stake in VMware should be spun out. EMC has different ideas, of course.

Anyway, the case is steadily building that nothing meaningful from an M&A perspective will happen at EMC. Jim Kelleher, an analyst at Argus Research, made this very case in a note to clients today: “We are not a fan of change for change’s sake. On balance we expect EMC to be essentially the same company in February 2015, when the CEO retires, as it is today.”

While it’s fair to consider that Tucci (pictured) is looking for something of a “grand exit” as he heads for the door, the more logical reason EMC might be in an aggressive deal-making mode is the fast-changing situation in the IT market itself.

The problem with EMC is that it’s too large and diversified, even for the largest firms — think HP or Cisco — to reasonably digest. HP could only contemplate an all-stock “merger of equals,” which would have created a massive $130 billion company. It wanted to value EMC at market rate, while EMC was said to be seeking a “significant premium.” Now that Cisco’s officially out of contention there are no other candidates left.

That leaves the “nothing” option. As Kelleher puts it: “EMC is best off in its current structure.” Under pressure from ambitious storage startups like Pure Storage , it is, he argues, fighting back by shifting more of its storage products to flash-memory-based systems and also embracing new ideas like software-defined storage.

It’s also financially strong enough to hold its own and keep its shareholders happy. Revenue grew seven percent in 2013 to $23.2 billion and profits rose about eight percent. It recently boosted its quarterly dividend by 15 percent and set its target for share buybacks to $3 billion for 2014. Shares have risen by more than 18 percent this year, though in fairness, much of that came after Elliott disclosed it had become EMC’s fifth largest shareholder.

Which brings us to the handicapping over who will be the next CEO at EMC. While it’s worth remembering that Tucci has put off retirement before, Kelleher says the odds-on winner is former CFO David Goulden, who was appointed CEO of Information Infrastructure earlier this year. Other names that have been mentioned as contenders include Pat Gelsinger, the former Intel exec who now runs VMware and who was once considered the front-runner to replace Tucci. Paul Maritz, the head of Pivotal, the big data software arm of EMC’s federation, is also in the running but has his work growing Pivotal cut out for him.

Changing CEOs along with its fundamental corporate structure at the same time sounds like more trouble than its worth, and there’s still a good chance the leadership stays intact.

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