EMC to Buy VMware for $635 Million

By Charles Forelle and Don Clark
16 December 2003
This article originally appeared in: Wall Street Journal

EMC Corp. agreed to buy VMware Inc., a software vendor that was a prime candidate for an initial public offering, in a $635 million deal that pushes the data-storage titan well beyond its traditional turf.

VMware's software lets businesses divvy up the processing power from a single server -- or large corporate computer -- that is based on the ubiquitous Intel Corp. architecture and assign it to multiple tasks. That technology, known as "server virtualization," has been in vogue of late as business customers look for new ways to squeeze more use out of their existing computer hardware.

Customers are also applying virtualization techniques to data-storage devices, and EMC's chief executive, Joe Tucci, says the two tasks are more easily and efficiently accomplished if the storage and server virtualization programs can work hand-in-hand. "Our customers are saying ultimately that they have to do this at the same time and together," he said.

But industry watchers also said the obvious connections between the companies were few and the deal was a clear signal that EMC hopes to become a less parochial vendor with more offerings to spread across a large customer's technology infrastructure. EMC -- which made its fortune selling big, expensive pieces of hardware -- is putting other vendors on notice that it's "heading down the road of being a systems-software company," said Vernon Turner, a group vice president at International Data Corp. Still, says Mr. Turner, "I find it an unusual marriage."

The acquisition is EMC's fourth this year -- but the only one that isn't well connected to the storage arena. The Hopkinton, Mass., vendor will pay cash and record a charge of about a penny a share in the first quarter of next year as a result. EMC said the deal won't affect the full year's earnings. VMware, which is profitable and has been going steadily, will be operated as a subsidiary and retain its headquarters in Palo Alto, Calif.

The closely held company was regarded as one of the most likely Silicon Valley candidates to go public in 2004, after Google Inc. and Salesforce.com. It was founded in 1998 by Diane Greene, a veteran of several Silicon Valley technology companies, and husband Mendel Rosenblum, an associate professor of computer science at nearby Stanford University.

VMware first attracted attention for allowing personal computer users to run Windows and Linux on the same system at the same time. But its star rose as companies deployed scores of larger servers based on Intel microprocessors. Instead of using one server for each application program -- a scheme that might end up using 5% to 15% of a server's capacity -- companies found they could save money on hardware by deploying VMware's products, which allow them to use 60% to 80% of a machine's capacity.

Ms. Greene, VMware's chief executive, said in an interview that an IPO would have been "kind of a distraction." She added: "This allows us to just overnight accelerate our growth." Mr. Tucci added that EMC will invest more in research and development than VMware would have been able to on its own.

Many large business customers have separate staffs to handle storage and server purchasing, and the VMware deal will give EMC's sales staff an entree to the latter group, which competitors such as International Business Machines Corp. and Hewlett-Packard Co. dominate. VMware has some 5,000 server customers. But "the challenge for EMC will be to change a sales force from one that's oriented towards selling hardware to one that's oriented towards selling software," says Frank Gillett, an analyst at Forrester Research.

VMware will notch sales of just under $100 million this year, Mr. Tucci said. He expressed confidence that the company would reach $175 million to $200 million in 2004. The deal values VMware at more than six times 2003 sales and more than three times its projected 2004 sales. Ms. Greene said she had other suitors. "We had a lot of possibilities on our plate," she said. "We had an embarrassment of riches."

Mr. Tucci said EMC had had its eye on VMware and had thought about a potential acquisition in mid-2004. But he pushed the date forward when he saw how much attention VMware had garnered.

EMC announced the latest deal after the close of regular trading. In 4 p.m. composite trading yesterday on the New York Stock Exchange, EMC was at $12.84, off seven cents.