EMC Gobbles VMware

EMC Corp. (NYSE: EMC) finished a busy shopping year today by acquiring server virtualization startup VMware for $635 million in cash and stock.

EMCs long-term strategy is to combine the Palo Alto, Calif.-based software company’s server virtualization programs with its own storage virtualization products to create software that provisions and manages storage comprehensively in data centers.

VMware has around 360 employees and had revenue of approximately $100 million in 2003. EMC forecasts VMware revenues of between $175 million and $200 million in 2004. It is the third major acquisition EMC has made since July. It previously purchased Documentum and Legato (see EMC Swings Into Software Big Leagues). EMC will operate VMware as a subsidiary. VMware’s president and CEO Diane Greene will stay on to run the VMware division in Palo Alto.

Howard Elias, EMC’s executive VP of corporate marketing, says the companies are a good fit despite one being storage-oriented and the other server-oriented.

“From the customer view, we’re both infrastructure providers,” he says. “Customers want to provision and manage applications through the entire enterprise.”VMware's server provisioning capabilities could be the missing piece of EMC’s storage virtualization puzzle -- but EMC will need additional development work, too, in order to offer what it views as a complete solution. Specifically, VMware has no distinct program for automatically provisioning certain applications.

“[EMC is] working on things that help you virtualize the data center,” says Forrester Research Inc. principal analyst Frank Gillett. “This is a step on the road, and it takes them in the right direction, but it’s not sufficient on its own. They still need server automation and provisioning.”

Approximately $600 million of the purchase price consists of cash. The deal is expected to be completed early in the first quarter of 2004. EMC expects to take a charge of approximately $15 million to $20 million in the first quarter of 2004 for the value of VMware’s ongoing research and development costs and other integration expenses. EMC expects the acquisition to decrease its earnings per share by $0.01 in the first quarter of 2004. It expects no impact on EPS for the full year in 2004 and expects it to add $0.01 to its EPS in 2005.

VMware was founded in 1998, delivered VMware Workstation in 1999, and entered the server market in 2001 with VMware GSX Server and VMware ESX Server. The company launched VMware VirtualCenter in 2003. VMware claims more than 5,000 corporate customers and two million registered users.

— Dave Raffo, Senior Editor, Byte and Switch