EMC has revived the idea of a downstream merger in which the company would be acquired by subsidiary VMware, Re/code is reporting this morning.

Actually, Re/code reported the idea a few weeks ago, noting that it was one of several options for EMC as the company tries to appease hedge fund Elliott Management. Today's development is that EMC's board, after the recent stock-market plunge driven by the Chinese market, is giving the idea a more purposeful look.

Elliott is the activist hedge fund that's been demanding major changes at several tech companies including Juniper and Riverbed; it's also voiced an opinion about the pending $16 billion acquisition of Alcatel-Lucent by Nokia.

In January, Elliott agreed to ease the pressure in exchange for EMC adding two outside directors to its board. That truce expires on Sept. 1, however.

Even though VMware is traded publicly, it's 80 percent owned by EMC. EMC itself has become more like a holding company for what it calls a federation of companies: VMware, Pivotal, RSA, and the original storage-networking business of EMC, now called EMC II.

EMC is hoping to add Virtustream to the list, having recently acquired the cloud software company for $1.2 billion.

Elliott would prefer that the federation be dismantled. At minimum, the hedge fund believes keeping EMC and VMware separate has diluted the valuation of each company — hence, the idea of glomming VMware and EMC together.

The downstream merger would involve VMware issuing $50 billion in new shares, Re/code reports. Most of these would be exchanged for EMC shares; some would be distributed to EMC shareholders along with some cash.

EMC shares were up 96 cents (4%) at $23.63 in morning trading, while VMware shares were down $3.38 (4%) at $77.84. The companies have market capitalizations of roughly $45 billion and $33 billion, respectively.