EMC (EMC) is likely to find a way to monetize its 86% position in VMware (VMW) in early 2009, Cowen & Co. analysts Louis Miscioscia and Walter Pritchard wrote in a pair of related notes today.

Miscioscia raised his rating on EMC today to Outperform from Neutral, specifically based on his expectation that the market will pressure EMC to do something with its VMW stake after January 2009. (It can’t do anything sooner for tax reasons.) As we move into the second half of this year, he says, shareholders are likely to “agitate” for a split-off (in which EMC holders would be given the option to exchange their shares for VMW stock), spin-off (in which EMC holders would be handed VMW stock) or secondary offering (in which EMC would sell the VMW shares in an underwritten offering). “All of the approaches make more financial sense than EMC’s stated position that they intend to hold VMW over the long haul,” Miscioscia writes. He thinks such a transaction could boost the value of EMC shares by 30% or more.

Pritchard cautions that VMW shares could see 5%-20% downside once investors begin to anticipate much higher float in the company’s shares; he asserts that the best way to play VMW is simply to own shares of EMC.

EMC CEO Joe Tucci has previously hinted at a willingness to make some move with the company’s VMW stock next year. Here’s an excerpt from a January 29 post I wrote from an interview with Tucci.

“Over time, we will do what is best for both sets of shareholders,” he [Tucci] says. “Our focus is on making sure both companies operate efficiently and effectively.” Asked whether it wouldn’t be better if VMW was a more liquid stock, he agreed. “Sure, a company of this kind of opportunity, it would be ideal to have more liquidity,” he said. “There are a lot of options down the pipe.” But don’t expect anything soon: for tax reasons, it is unlikely EMC will sell more VMW shares before 2009.

The WSJ has a nice story today on the outlook for virtualization software, a market dominated by VMware, with Microsoft (MSFT) a recent entrant.

EMC shares today are up 54 cents, or 3.5%, to $16.15; VMW is up $1.32, or 2.3%, to $59.61.