I (like Ant/anthonyms and perhaps others here) was a former EMC Corporation shareholder. When Dell acquired EMC Corporation for $67 billion on September 7, 2016, I was paid cash for my EMC Corporation common shares and given shares of a newly created Dell Technologies, Inc. (DVMT), which became the world’s largest privately-controlled tech company.
Dell Technologies does not have publicly-traded Class A, Class B or Class C Common Stock. After the completion of the merger with EMC Corporation, the company issued Class V Common Stock or “Tracking Stock” shares that are intended to track the performance of a portion of Dell Technologies’ economic interest in the VMware business. Dell Technologies’ Class V Common stock is listed on the New York Stock Exchange (NYSE) and traded under the trading symbol “DVMT.” The shares began trading on September 7, 2016.
It’s important for Pivotal Software (PVTL) investors to know about Dell Technologies because it is Pivotal’s majority stockholder, owning, indirectly through its subsidiaries (including VMware, Inc.), 175,514,272 shares of Pivotal’s outstanding Class B common stock that represent approximately 70.1% of Pivotal’s total outstanding shares of common stock and approximately 95.9% of Pivotal’s combined voting power immediately after this offering (or approximately 95.6% if the underwriters exercise their over-allotment option in full). Pivotal Software is a “controlled company” within the meaning of the corporate governance rules of the New York Stock Exchange.
[Source: https://www.sec.gov/Archives/edgar/data/1574135/000104746918… ]
Some here (Saul, Ant and SteppenWulf) have already expressed concern about this control structure of Dell Technologies.
Saul: Hi Steppenwulf, Your comments interested me, but this is what I found out: Dell still owns 70% of the company post-IPO and 96% of the voting power. Pivotal is thus actually a wholly controlled subsidiary with a small slice of its shares trading in the open market. Dell itself is a core piece of its business, providing Pivotal with a large source of its revenues.
That wasn’t encouraging.
Ant: The one additional piece I worry about beyond this revenue model transition is to what degree the attractiveness of the Pivotal business that I knew has been handicapped by DELL - with voting rights, accounting interference and specifically debt loading.
SteppenWulf: I wonder and worry about this also…
There is a significant reason for this control mindset.
Previously, the top management of the former EMC Corporation wanted as much as possible control of its subsidiaries and entities that made-up what was called the EMC Federation. For examples, Joseph Tucci was the Board Chairman and CEO of EMC Corporation, the Board Chairman of VMWare Corp. (partially owned by EMC) and the Board Chairman of Pivotal Software (partially owned by EMC). During Tucci’s reign, the EMC Federation made significant accomplishments in data storage and was at the forefront of iCloud research and development. The following focuses on Pivotal Software:
• In 2009, EMC and Cisco, with investments from VMware and Intel, formed a joint venture called VCE (Virtual Computing Environment aka Acadia) to develop products and services for the converged infrastructure and cloud computing markets.
• In April 2011, the announcement of Cloud Foundry took place. Cloud Foundry is an open source, multi-cloud application platform as a service (PaaS) governed by the Cloud Foundry Foundation, a 501(c)(6) organization. The software was originally developed by VMware and later in 2013 transferred to a new company Pivotal Software.
• In April 2012, BOSH, an open source tool chain for release engineering, deployment & life-cycle management of large scale distributed services, was publicly launched.
• In April 2013, a joint venture by EMC, VMware and General Electric launched a new company Pivotal Software to market assets including Cloud Foundry, RabbitMQ and Spring.[Note: Privotal’s roots go way back to 1989, when it was founded by Robert Mee (who today is CEO of PVTL); EMC acquired Pivotal in 2012. ]
• From the start, Pivotal Software shined in its platform as a service play (PaaS) which leveraged Cloud Foundry and Spring. Many vendors came on board with the open source Cloud Foundry project, and many other companies contributed to the project. Back then, Cloud Foundry became the “de facto PaaS standard.”
• In December 2015, Pivotal acquired European Cloud Foundry development and services provider CloudCredo. This deal gave Pivotal both a face in Europe and the experience and insights the CloudCredo team has gained via its Cloud Foundry projects.
While all the above and other good things were going on, EMC Corporation was highly rated by analysts with 4 and 5 stars, but its stock price appreciation was mediocre and downright disappointing. I called it a “Rodney Dangerfield” stock because it got “No Respect” from investors. This also caught the attention of activist investor Paul Singer, hedge fund manager of Elliott Management Corporation, whose Portfolio Manager Jesse Cohn, sent the following letter dated October 8, 2014, to EMC Chairman Joe Tucci and Board members available at this website:
I am writing to you on behalf of Elliott Associates, L.P. and Elliott International, L.P. (collectively, “Elliott” or “we”), which collectively own 2.2% of the common stock and equivalents of EMC Corp. (the “Company” or “EMC”), making us one of your largest shareholders. We greatly appreciate the dialogue we have established with Joe and his team and we look forward to continuing it.
Since the publication of news reports detailing our position, we have received numerous calls from fellow shareholders requesting our views and sharing theirs. In addition, EMC management has spoken publicly about their view of the Company’s structure. The purpose of today’s letter is to share our thoughts on the right path forward. We hope this will help to inform Joe and the Board as part of EMC’s current review process regarding the long-term value-maximizing pathway for the Company.
The summary takeaways from our letter, which are more fully described below, are:
• EMC’s current structure – “the Federation” – obscures enormous value at EMC
• EMC should pursue pathways to recognize this value, including a separation of VMware from Core EMC and/or various M&A opportunities
Stock Price Underperformance
Though EMC is a leader in numerous markets with great products, EMC’s stock price has deeply underperformed its proxy peers and the market over all relevant time periods. It is important to keep in mind that the current structure (EMC + VMware) has existed over the entire timeframe illustrated below. The below chart highlights EMC’s stark underperformance as of July 18, 2014, the trading day prior to the public disclosure of Elliott’s position in EMC.
Bottom-line, EMC was being pressured by Elliott Management to reorganize their unusual “Federation” structure, in which EMC’s divisions were effectively being run as independent companies. Elliott argued this structure deeply undervalued EMC’s core “EMC II” data storage business, and that increasing competition between EMC II and VMware products was confusing the market and hindering both companies.
Needless to say, Joe Tucci, who was about to retire, was extremely upset by this threat from Paul Singer, who was also called by some a ‘vulture capitalist.” Actually, I am a follower and admirer of Paul Singer and totally agreed with his letter as an EMC stockholder. Long story short, Tucci sought and on 10/12/2015 found an iron-clad way to thwart Singer by agreeing to be acquired by privately-held Dell Inc.
Dell Inc. and EMC Corporation today announced they have signed a definitive agreement under which Dell, together with its owners, Michael S. Dell, founder, chairman and chief executive officer of Dell, MSD Partners and Silver Lake, the global leader in technology investing, will acquire EMC Corporation, while maintaining VMware as a publicly-traded company.
EMC shareholders will receive $24.05 per share in cash in addition to tracking stock [note: this became Dell Technologies] linked to a portion of EMC’s economic interest in the VMware business.
Thus, evolved the current iron-clad control mindset and corporate structure with a parent company - Dell Technologies - that has no publicly-traded Class A, Class B or Class C Common Stock. It appears that a “Dell Federation” is in place. So going back to the October 2014 Elliott Management letter to the EMC Board to change the federation structure, that issue has been ignored. Here are the current management in place:
Dell Technologies Inc. (DVMT) with a $57.74B market cap
Michael Dell, Chairman & CEO
Thomas Sweet, CFO
Pivotal Software, Inc. (PVTL) with a $4.77B market cap
Paul Maritz, Chairman
Robert Mee, CEO & Director
Cynthia Gaylor, CFO
Note: A huge plus is that Robert Mee, original founder of Pivotal in 1989, is still aboard.
VMWare (VMW) with a $56.16B market cap
Michael Dell, Chairman
Patrick Gelsinger, CEO & Director
Zane Rowe, CFO
Regarding the Elliott Management issue about EMC stock price underperformance, Pivotal Software in its current realm and exposure as public company has the best chance to improve this as this company transitions and grows into a hybrid subscription-based (PaaS) from a service play (PaaS).