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EMC eyes the server with $635 million VMware buy

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In one of its boldest acquisitions to date, EMC has announced plans to scoop up virtual machine software maker VMware.

EMC has pounced on a number of software vendors over the past year - Legato and Documentum - but none of the past deals place the company so squarely on the server. VMware makes the industry's premier set of partitioning tools for running both Windows and Linux on a single server and running multiple applications on a single system. EMC plans to grab the privately held VMware for $635 million in cash.

The two companies expect the deal to close in the first quarter of 2004 if customary approvals go through.

VMware has been on a heck of a run over the last couple of years, as companies looked to consolidate their data centers and squeeze as much as possible out of every machine. The company has an impressive customers list and has forged strong ties with IBM, in particular, and HP and Dell. All three hardware makers resell VMware's software, and IBM touts the technology as a key piece of its Intel-based server software strategy.

With VMware on its side, EMC will be looking to move deeper into server management and how. The company is already talking up a storage-to-server virtualization package.

EMC has been working on a stealth project with VMware over the past year, according to EMC President and CEO Joe Tucci. The project includes building parts of VMware's virtual machine technology into EMC's storage management software. Tucci would not say exactly what this technology does or when it will roll out but tried to stir up interest in the effort with a series of vague comments.

"I don't want to give a time for when we will launch it," Tucci said. "It will have a significant impact on things."

Tucci did describe a scenario where VMware's software could be used to backup new forms of data. EMC can currently perform long distance backups of static information. With VMware's VMotion product, however, ECM reckons it might be able to do long distance backups of all the information on a server, including what is stored in memory and registers.

It's this kind of talk that must have folks at IBM and HP worried.

"VMware was a nice, little company that provided great value for IBM's xSeries (Intel servers)," said Gordon Haff, an analyst at Illuminata. "Suddenly - even if EMC still willing to do everything that VMware was - IBM won't be as comfortable."

"IBM was willing to cede or at least share various software control points to VMware because VMware was not really a threat, but EMC is."

The plot thickens at speed.

Tucci, however, worked hard during a conference call with analysts to dispute such concerns. VMware will operate as a subsidiary and remain "open" and "committed" to past OEM and ISV relationships.

"We have contacted (HP and IBM) and assured them of our openness," Tucci said.

EMC, as you all know, has a long tradition of openness with IBM and HP, so these companies were sure to find comfort in this promise.

On the Dell/EMC front, all looks well. Dell invested tens of millions in VMware and is in a hardware pact with EMC.

VMware is stacked full of hardcore engineering types right up to the top of the executive ranks, and these people have longed for their products to be industry standards. It's hard to imagine them giving into EMC with the thought that all of the OEM and ISV ties would dissolve. Still, stranger things have happened.

One of the more intriguing questions the VMware buy raises is how Microsoft will respond. Microsoft tried to acquire VMware last year, only to end up settling for Connectix - maker of VirtualPC. Microsoft has yet to roll out a server version of the the Connectix product, delaying the release several times. These delays come as Microsoft has refused to support customers who use VMware. Will EMC be able to put some pressure on Redmond to field support calls from now on?

Potential troubles aside, VMware now has a larger sales force and services organization backing it up. The company has been profitable for five quarters in a row, and should post between $175 million and $200 million in revenue next year. EMC could provide the VMware folks with a much bigger channel for moving the GSX Server and ESX Server products.

On the EMC side, the company is confident it can handle integrating three software companies into the fold at once. Legato is moving along nicely, and the Documentum deal is about to close this week, Tucci said.

EMC has truly upped its position in the data center management space with all of these acquisitions. The fact that a vendor such as IBM did not snatch VMware first points to EMC's intense ambitions and focus moving forward. Whether or not the storage giant can beat out server rivals for CIOs' hearts remains to be seen. But the groundwork is well underway for such a move. ®

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