EMC Corp has made its second shock acquisition of the year, splashing out $635m in cash to buy VMWare Inc, so moving into an entirely new market and throwing IBM Corp and Hewlett Packard Co’s utility computing plans into confusion.
VMWare is a very successful and high profile privately held supplier of server virtualization software. Its complex technology allows Intel server and desktop processors to run multiple instances of Linux, Windows and Novell operating systems and applications. The software can also move operating systems and applications between processors on the fly, and share workloads between processors.
That software was at the heart of IBM and HP’s utility strategies. Now it belongs to EMC, an archrival of both companies, and there is no obvious alternative source of the technology.
EMC CEO Joe Tucci said he had contacted both giants with the glad news of the purchase, and a reassurance that EMC will maintain VMWare’s neutrality. Tucci said one of the two had already responded by the time of EMC’s announcement and was very anxious to continue its relationship with VMWare. He did not say which of the two that was.
EMC may well have beaten off both in its negotiations to buy VMWare. Tucci said that he had not originally planned to make the purchase until next summer, but the moment of truth moved to now. This summer EMC bought Legato Software Corp, and on Thursday this week its acquisition of Documentum Corp will be completed. Clearly EMC would rather have delayed buying VMWare until it had fully digested those two much larger acquisitions.
The announcement of EMC’s intent to buy content management software supplier Documentum surprised many because it will take EMC into a market not directly related to storage. The purchase of VMWare moves EMC even further into new territory. However its well-established relationship with Dell will provide a channel into the server market for VMWare’s software. EMC emphasized that it will not jeopardize its relationship with Dell by moving into server hardware.
By integrating VMWare’s software with EMC’s disk mirroring software, EMC will be able to offer one product that can automatically fail over a complete set of servers, applications and disk storage to remote or backup systems. EMC said the first such integration will ship within a few month of the VMWare purchase, which is expected to be completed early next quarter.
One risk for EMC is that HP and IBM may cold-shoulder VMWare’s software, so closing off a very large part of the Intel-based server market. VMWare CEO Diane Greene said: It would be very disappointing if they did, but I can’t imagine why they would. The only reason they might is if we became unfriendly to them – and not doing that was a condition made upfront at the start of the [acquisition] negotiations. Greene said one of the reasons she was attracted to a merger with EMC was that VMWare had always wanted to maximize its market by not favouring any one-server maker, something that would not be possible if HP or IBM had bought it.
The cash price of $635m represents a factor of three on VMWare’s projected 2004 revenue of between $175m and $200m – a projection that excludes any help from EMC’s sales force. EMC said that initially its sales staff will not directly sell the VMWare product, but will help with lead generation. Last year VMWare’s revenue was just under $100m, and the company has doubled its revenue every year for the last four years. Like Documentum and Legato, VMWare will be operated as a division within EMC. It will maintain its operations in Palo Alto, California, and will be headed by Greene.
This article is based on material originally produced by ComputerWire.