EMC Wants To Be VMWare

Includes: DVMT, VMW
by: Dana Blankenhorn

There's a joke in the headline.

EMC is already VMWare (NYSE:VMW). That is, VMWare was originally spun out of EMC and EMC owns 80% of VMWare.

That said, VMWare is valued by the market at $39.38 billion, with a PE of nearly 71, while EMC is valued at $45 billion, with a PE of 23.

It's for this reason that EMC CEO Joe Tucci recently told a German newspaper he considers EMC primarily a software company, and that he's looking to make some big deals in cloud security soon to emphasize that.

EMC is best known for its data clusters, a key cloud hardware component, and one of the bright spots of the whole hardware space. This is a $30 billion market growing at nearly 47% per year, and EMC has nearly 29% of it.

Yet take out EMC's 80% of VMWare and the rest of the company, including that data storage unit, is worth just $13 billion. That's not an aberration. It's just about what NetApp (NASDAQ:NTAP), the market's second-leading player, is worth in total.

Cloud investors, it would seem, value software over hardware in a big way.

Cloud security, however, is as much a buzzword as cloud. Every security company claims a play in it, just as every software company claims a play in cloud. TechNavio sees this market growing at 41% per year through 2014 , sees Intel's McAfee as the chief competitor, but identifies two possible targets for EMC, firms with large market shares that could be taken out at the right price:

  1. Symplified Networks, which is privately held. Granite Ventures and Allegis Capital are the two leading investors.

  2. Trend Micro (OTCPK:TMICY), a 20-year old security company that launched in California, moved to Taiwan, and is now based in Japan. The company is publicly traded in Japan.

Of the two, Symplified would be the purest play, while Trend Micro would provide the bigger headline. Were Tucci to acquire one of these two firms, he could then spin out the data storage unit and go to market as a pure cloud play under the VMWare name.

The key for investors is that EMC would become a pure software play, justifying a PE closer to VMWare's. Tucci has already said that something like this is his strategy, making EMC a very interesting speculation.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.