The danger in undervaluing EMC

Here's a puzzle: Take a long-established company that sells its products to nearly every Fortune 500 company and reaps $12 billion in revenue and more than $1 billion a year in profit. Add to that another company whose market capitalization is $33 billion. Now add about 30 other companies of varying values between $100 million and $2 billion. How much should this long-established parent company be worth?

If you said only $41 billion, you must own EMC stock, because it's one of the few cases where the market claims that the whole is worth substantially less than the sum of its parts.

This past Wednesday, I spent the day listening to a stream of EMC executives talk about how the company is innovating in its business models, processes, software, consumer products, and security. And despite the very-real risk of death by PowerPoint slides and opaque vocabulary (just what is "solutioneering", anyway? It certainly isn't in the dictionary.), the day was full of unpolished gems that make me think the company is seriously undervalued. After all, this isn't your father's EMC; EMC now:

• Sells information systems, not storage. Rich Napolitano, Senior Vice President for Storage Platform Operations, said that EMC's systems-wide approach to solving customer problems was what lured him to the company from Sun Microsystems. He said, "EMC sells complete information systems just like Sun, IBM, and others; we just don't sell the servers." And in today's multi-vendor data centers, being a server vendor-neutral provider is actually an advantage.


• Has focused its acquisitions on software, not storage. EMC CEO and Chairman Joe Tucci quizzed the audience on how much of the $8 billion EMC has spent on acquisitions it had spent on hardware companies. The answer: zero. Five years ago, the concept of EMC becoming a software company seemed ridiculous. Today, it looks downright prescient. After all, Tucci noted, even the hardware guys put most of their value into software nowadays. Oh, and did we mention that the margins on software are higher -- a lot higher?


• Sees VMware as competitive weapon as well as a product. As the Wall Street Journal noted Thursday, EMC has no interest in selling the 86% of VMware it owns, despite the fact that VMware's market cap had eclipsed EMC's in recent months. But while VMware has assembled a tidy business selling its virtualization products, the bigger impact of EMC owning VMware will likely be several years from now, when EMC's other products will be able to migrate databases, application images, and content stores around network environments seemingly without regard for the underlying hardware. And when competitors try to replicate that flexibility with their products, they'll discover that without VMware's intellectual property, they'll be years behind.


• Licenses consumer software and services. EMC demonstrated Intel's SS4200-E, an Intel-OEMed home server product, based on a skunk-works EMC effort [Note to Intel: get someone to work on your consumer product naming]. But even more impressive, EMC will license its Lifeline software stack that powers that device to other hardware OEMs who wish to offer similar products for consumers and small and medium-sized businesses. And every buyer of those home server products will see "Software by EMC" logos on them too, boosting the company's name recognition and new software emphasis. Don't want to own a home server to back up your digital life? No problem -- EMC now offers in-the-cloud backup services through its recent acquisition of the online backup service, Mozy.com.


• Boasts the best security story of any enterprise vendor. In the excitement of the VMware initial public offering, the world seems to have forgotten that EMC also owns probably the leading security company in the US: RSA Data Security. While the company is best known for its SecurID authentication systems, RSA also has a huge asset base of security personnel and research intellectual property -- for example, much of the encryption technology that secures eCommerce sites -- that EMC now is building into its products. And with EMC presenters like Dennis Hoffman telling the EMC-RSA security story in self-deprecating, funny, and easily understandable ways, security will likely become as big a selling proposition for EMC as virtualization is.

So with all these plusses, why is EMC still undervalued and unappreciated by investors? Blackfriars believes that EMC's story is just too hard to understand. EMC's brand and language are stuck in its storage past, and executives like Joe Tucci are still telling EMC's story as if the only people listening are CIOs and data center managers. That's why we hear such investor-hostile slang as "information lifecycle management", "virtual provisioning", "RAID-6", and "remote RDF" in meetings like yesterday's. EMC aficionados and storage analysts know what EMC is talking about; everyone else just tunes out. It's also why the Wall Street Journal writes about VMware's ownership rather than more substantial topics; acquisitions and IPOs are a whole lot easier to present to an investor audience cogently than virtual provisioning and storage snapshots.

Another challenge EMC faces is that it has a strong brand that no longer really fits its business. EMC has spent 28 years and millions of dollars building up an IT brand that stood for high-end, gold-plated storage. But in the last five years, EMC has changed from a storage vendor to a diversified technology company appealing to everyone from enterprises to consumers, and it hasn't substantively changed its brand or what it stands for. Is it any wonder than EMC's stock price is similarly unchanged?

Other companies have faced similar challenges and overcome them. IBM rebranded itself under "eBusiness" to leave its mainframe legacy in the past. BP used "Beyond Petroleum" to convince consumers to look past its oil heritage to a greener future. Apple challenged its few but loyal customers to "Think Different". And in all those cases, companies that were considered moribund and undervalued suddenly were revitalized -- and so were their stock prices. They simply needed a clear story to rally investors behind.

One more thing: Wall Street undervaluing EMC's stock endangers the company. Unless EMC can convince Wall Street its future is greater than the sum of its parts, IBM, Cisco, or even a private equity firm like The Blackstone Group could buy out EMC to sell off its storage business and acquisitions (including VMware) and pocket billions in the process. And that would be a sad price to pay for just not telling a better story.

Full disclosure: the author has no position in EMC at the time of writing.

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