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EMC undervalued? Not quite

Barron's Online came out with an August 20 article titled "An Unloved Store of Value" contending investors don't fully appreciate the value VMWare provides to EMC. At $18, the stock was undervalued the article contends, "EMC will benefit directly from VMWare's rising profits and will also enjoy gains in sales of storage-area networks, thanks to virtualization's growth. It could be a $22-$23 stock."

However, EMC has three other important business segments on top of the VMWare value. These businesses must be included in any EMC valuation, and, as we'll see, when everything is taken in as a whole, perhaps EMC is not undervalued, after all.

VMWare's Value
On August 14, 2007, 10% of VMWare's shares were sold by EMC through an initial public offering (IPO) at $29. This gave EMC $1.1 billion in cash before fees to the investment bankers. Since then, the price of VMWare's shares has risen to the $60 level, generating a very nice unrealized profit for all who owned shares in the company.

In July 2007, shares of VMWare were sold to Intel and Cisco. Each company was able to acquire their shares at a price lower than the IPO price. The primary purpose of these sales was to enhance the relationship of these companies in the virtualization software business, the mainstay of VMWare. It also turned out to be a good investment for Intel (Nasdaq:INTC) and Cisco (Nasdaq:CSCO) as shown in the table below.


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