Intel Drops Real Cash On Virtual Server Vendor VMware

server virtualization

Intel Capital Monday said it will invest $218.5 million to purchase Class A common stock of VMware, subject to regulatory review, giving it a 2.5 percent stake in the company at the completion of the VMware IPO, expected this summer.

Storage giant EMC said in February that it will sell a 10 percent stake in VMware through an IPO in a move to help VMware employees realize more value from the company independent of what they receive as part of the overall EMC organization.

EMC acquired VMware in December of 2003 for $635 million.

In addition, Intel will appoint one of its executives to VMware's board of directors. The Intel appointee, expected to be unveiled prior to the VMware IPO, will bring the number of directors to seven, up from six currently, said a source close to VMware.

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Intel has had a long-standing technology and marketing alliance with VMware.

Intel has spread its investment cash around the virtualization industry. In September 2005, Intel Capital invested $8.5 million in Virtual Iron, then a startup in the server virtualization market.

Intel Capital's investment in VMware is part of an ongoing effort by Intel to promote virtualization technology, said an Intel spokesperson.

"The more we can harness the horsepower in hardware by doing creative things like virtualization in software it's going to help our side of the business by creating increased demand for processors," the spokesperson said.

The spokesperson said Intel would continue to explore relationships with other companies working in virtualization, but noted that VMware was currently recognized as the leader in the field.

"We have actually made investments in several other virtualization-related companies, though this is obviously the largest such investment to date. We have relationships with a number of companies like Novell, Red Hat, Microsoft and Xen. Our primary interest is in promoting the technology and moving it forward," the spokesperson said.

VMware executives declined to comment on the investment. However, a source close to the company said that the investment formalizes the existing relationship the two have in joint product development.

The source also noted that the investment will not preclude VMware's continuing technology with Intel rival AMD.

Several solution providers said they are not surprised by Intel's move, given how closely the two companies work and how the server market is changing.

Hope Hayes, president of Alliance Technology Group, a Hanover, Md.-based VMware solution provider, called the investment a smart move on Intel's part.

"Customers are 'VMwaring' their Intel boxes," Hayes said. "Think about it. A whole bunch of servers based on Intel products, and VMware is shrinking a lot of those boxes. Intel is looking at the future. A lot of customers have bought VMware to virtualize their Exchange servers. Now they have a lot of servers they're not using."

Hayes said that Intel is very smart in its investments, and as a hardware company sees the future as more software-oriented. "I'd like to see the list of software companies Intel plans to invest in," she said.

Greg Knieriemen, vice president of marketing at Chi, a Cleveland, Ohio-based storage solution provider, said the investment validates the strength of the VMware platform.

"There's not a medium or large company out there without VMware or at least evaluating it,' Knieriemen said. "VMware is having a big impact on the storage business, especially with the SAN components needed to play with VMware. VMware requires additional centralized storage resources, which is forcing companies to evaluate their SAN architectures.

Another VMware channel partner looks forward to the possibility of more products and services from the vendor in the coming months.

"From a partner standpoint, we went through a similar thing when HP purchased Mercury Interactive," said HB Farris, practice manager of function testing services at Blue Bell, Penn.-based VAR Genilogix. "We had been a Mercury partner and became an HP partner without a blip. And we found that after the acquisition we had a greater range of products to choose from, and as a partner we could use that to expand our services."

"Nine times out of 10, I think these things turn out well for the channel," Farris added.