December 15, 2003 5:51 PM PST

EMC acquires server specialist VMware

Storage specialist EMC announced plans Monday to acquire VMware, a start-up that sells software to make servers more flexible, for about $635 million in cash.

The move will help EMC reach further into the world of utility computing, a trend sweeping the industry as companies search for ways to make information technology easier to manage and more efficiently used, the Hopkinton, Mass.-based company said.

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What's new:
Storage specialist EMC plans to acquire Vmware for about $635 million in cash.

Bottom line:
The acquisition indicates that EMC intends to expand into the same advanced systems management area targeted by IBM, HP, Sun Microsystems, Microsoft and others. It also could reshape alliances in the growing market for Intel-based servers because VMware has been a close partner to IBM and Hewlett-Packard, but also has alliances with Dell and Unisys.

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VMware and EMC are in different realms, though. Whereas EMC is geared toward storage systems and data-management software, VMware's software is geared for use on servers.

"It is going to push EMC a bit into areas they haven't been comfortable with before," said Illuminata analyst Gordon Haff. "A lot of what VMware does is...server-centric. It certainly is a movement a long way from traditional big storage iron."

But EMC Chief Executive Joe Tucci said separation between storage and servers is becoming a thing of the past. "Until now, server and storage virtualization have existed as disparate entities. Today, EMC is accelerating the convergence of these two worlds," he said in a statement.

The technology will help EMC join different manufacturers' information technology into "a single pool of available storage and computing resources," the company said in a statement.

The acquisition indicates that EMC, which already has a major presence in large corporations, is trying to expand into the same advanced systems management area targeted by IBM, HP, Sun Microsystems, Microsoft and others.

VMware's software lets a single server run multiple operating systems simultaneously on different "virtual machines," a technology well developed in expensive mainframe computers, maturing in Unix servers, and now arriving in lower-priced machines based on Intel processors.

VMware, based in Palo Alto, Calif., is profitable and was planning an initial public offering.

The acquisition, expected to close early in the first quarter of 2004, could reshape alliances in the growing market for Intel-based servers. VMware has been a close partner to IBM and Hewlett-Packard and also has alliances with Dell and Unisys.

IBM's and HP's comfort working with a neutral start-up may not carry over to EMC, a competitor in the storage domain, Haff said.

New revenue
The acquisition will add $175 million to $200 million in revenue in EMC's next fiscal year, Tucci said. EMC's per-share earnings will drop about one penny in the first quarter of 2004, but be unchanged for the full year. Earnings should increase by one cent per share in 2005, he said.

EMC plans to take a charge of $15 million to $20 million in the first quarter of 2004 to cover in-process research and development and other acquisition costs, EMC said.

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EMC had planned to acquire VMware in the summer of 2004, but accelerated the schedule when interest in the company began to increase, Tucci said.

EMC has made two other major software acquisitions in recent months: Documentum, which sells software to manage digital content, in October and Legato, which sells backup software, in July.

EMC will retain all VMware's 370 employees, Tucci said, adding that the company is ?going to add to the research and development staff, and sales and marketing." With the new employees, "We expect to approximately double revenue year on year," he said.

Diane Greene, VMware chief executive and one of its five founders, will continue to run the company. "I'm committed to ensuring continued growth of VMware in the future and will remain with EMC for the long term," she said during a conference call.

The end of independence
VMware opted for an acquisition so it could grow as fast as possible, Greene said in an interview. But the company ruled out becoming part of one server maker that would damage relations with others. EMC, which has a long history of working with all server makers, fit the neutrality requirement, she said.

"We were feeling intense pressure to accelerate our growth. All the sudden, the interest was from every major player in the industry. There's a certain amount of risk of being a 370-person company in the face of that intense interest," Greene said. "We wanted someone we thought would minimize the impact on our partners."

However, EMC's acquisition still could step on the toes of business partners who have their own strategies for dealing with utility computing.

"IBM has had an important strategic relationship with VMware," Haff said, with VMware making IBM's high-end xSeries Intel servers much more useful and with IBM integrating VMware features into its Director management software.

But large companies are accustomed to simultaneous competition and cooperation. Hewlett-Packard--which has both extensive virtualization technology plans and a fierce competition with EMC in the storage market--said its relationship with VMware will remain unchanged.

IBM representatives couldn't immediately say if the acquisition will change Big Blue's relationship with VMware.

VMware and EMC said they are eager to continue to work with outside partners, including the continuation of a software development kit that will let companies incorporate VMware's software as a component in their own utility computing technology.

First products
VMware will be a subsidiary within EMC, but the company will release products that span EMC's traditional storage market and VMware's server market.

One of the first joint products will emerge "in the first couple months" after the deal closes, Tucci said. It will be a combination of EMC's SRDF, which lets a customer keep a copy of a primary storage system and activate it as the primary version, and VMware's VMotion, which lets a server virtual machine be moved from one physical system to another.

With the two, Tucci said, "Business transactions in process could continue uninterrupted," even as a customer switched operations from one location to another to deal with disasters, maintenance or other issues.

More products are on the way, many sold by EMC's original sales force as well as by that of VMware. "There will be at least 20 products we will link and bring to market with our products," Tucci said.

For example, VMware's technology will help EMC with virtualization in its storage systems, Tucci said. Virtualization is a process of abstraction that lets jobs be moved from one system to another more easily, which helps administrators respond to changing requirements such as system upgrades or failures.

 

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