EMC to Absorb VCE Joint Venture,Cisco to Keep 10% Stake

EMC Corp., the maker of storage computers facing pressure from an activist shareholder to break up, said it will acquire most of Cisco Systems Inc.’s stake in joint venture VCE, which sells high-end data center equipment.

Cisco will keep about 10 percent of VCE, the companies said in a statement today. EMC will meld the joint venture into its business, while Cisco and VMware Inc. will continue as strategic partners. EMC is the majority owner of VMware. Terms weren’t disclosed.

In 2010, Cisco joined with EMC, virtualization company VMware and chipmaker Intel Corp. to form VCE, which makes pre-configured systems that combines the companies’ technologies. Hopkinton, Massachusetts-based EMC announced its plan for VCE as activist shareholder Elliott Management Corp. pressures it to spin off the faster-growing VMware, saying doing would make the rest of EMC more attractive to other buyers.

“The last thing on investors’ minds is the future of VCE,” Daniel Ives, an analyst with FBR Capital Markets, wrote in a note today. “EMC has a fire in its house right now and the company appears focused on painting its bedroom (e.g. VCE), while the Street wants a resolution on the strategic ownership situation sooner rather than later.”

EMC rose less than 1 percent to $27.37 at the close in New York, while VMware tumbled 7.1 percent to $81.95. Cisco declined 1.1 percent to $23.26.

EMC is organized into what it calls a federated model, with Chief Executive Officer Joe Tucci overseeing several different entities that each have their own CEO, including the company’s information infrastructure business, VMware and the Pivotal joint venture between EMC and VMware. VCE will now become one piece of the federation, a person with knowledge of the transaction said yesterday before the deal was announced.

Hewlett-Packard

EMC’s board has been considering strategic options, including a spinoff of VMware. EMC has also held talks about a merger with Hewlett-Packard Co., which stalled over disagreements on price, people familiar with the matter have said. Elliott made its push for EMC to spin off VMware public earlier this month after technology companies including Hewlett-Packard announced plans to carve themselves into pieces to maximize shareholder value.

VCE provides chief information officers with building blocks for data centers and its sales are on pace to reach $2 billion in 2014, the companies said today. That’s up from a prior forecast given in May of $1.8 billion.

The VCE transaction is expected to be completed in fourth quarter, according to the statement. The acquisition is expected to to have no material impact to EMC’s profit for the full 2014 fiscal year. EMC will begin reporting VCE financials as part of its consolidated statements when it’s completed.

EMC Forecast

EMC, which today reported third-quarter earnings that fell short of analysts estimates, also revised its full-year forecast. Full-year earnings will be $1.90 a share on sales of $24.5 billion, EMC said. That compares to EMC’s prior forecast for profit of $1.91 on sales of $24.58 billion in July. Analysts on average had estimated $1.91 on revenue of $24.5 billion.

VMware, which reported earnings yesterday, forecast fourth-quarter sales that may miss estimates, citing a tougher environment for signing large deals.

Revenue in the current period will be $1.67 billion to $1.71 billion, VMware said yesterday on a conference call. Analysts on average had projected sales of $1.71 billion, according to data compiled by Bloomberg.

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