Partners: Cisco's Loosened Ties To VCE A 'Precursor' To Big M&A Move

Solution providers said Wednesday that Cisco's decision to reduce its ownership stake in VCE is likely a precursor to another, potentially bigger move being plotted by the San Jose, Calif.-based networking giant.

"This is just the tip of the iceberg," said Bill Smeltzer, CTO at Focus Technology Solutions, a Seabrook, N.H.-based Cisco Gold partner, of the Cisco-VCE news. "It's starting to lay the groundwork for something else."

Cisco Wednesday said it is reducing its ownership stake in VCE, the converged infrastructure joint venture it created with VMware and EMC in 2009, from 35 percent to 10 percent. EMC is buying the majority of Cisco's stake -- bringing its total VCE ownership stake to roughly 90 percent -- and absorbing VCE into its Information Infrastructure business.

[Related: VCE As Part Of EMC II To Be More Agile, Keep Cisco At Core: Execs]

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Partners said Cisco's loosened ties to EMC and VCE could open the door for the networking market leader, who in August was sitting on cash and cash equivalents pile worth $52.1 billion, to acquire an EMC rival like NetApp.

"I think there is a lot more to come. I think there has to be," Smeltzer said. "[Cisco] is either going to take [its Invicta flash storage] to the next level, or they are going to probably go out and acquire a storage company. And to me, if they were to acquire somebody, they would probably try to buy NetApp."

Another Cisco partner, who requested anonymity, agreed that the shake-up in VCE ownership will likely prompt more M&A moves -- particularly in the storage and virtualization markets -- from Cisco.

"This has to be a precursor to another move," said the partner. "Cisco isn't going to just bow out or take a much smaller, diminished stake in VCE if they are not planning on doing something else. The question would be, what is that something else? If they came out and said 'We are buying NetApp' or 'We are buying Citrix and now we have our own VCE-like platform,' that would make sense as to why they did this."

Cisco and NetApp already partner today around FlexPod, a converged infrastructure architecture that competes with VCE's Vblock.

The partner said Cisco creating its own 'VCE-like' platform with technology from NetApp and Citrix would put pressure on partners to align themselves with either Cisco or the EMC federation of companies, which includes VMware, RSA, Pivotal and, now, VCE.

"The holy trinity of Cisco, EMC and VMware -- there are a lot of partners who have their chips on those three bets. And if there is a lot of grinding of the gears between those three, that puts a lot of pressure on the partner community," he told CRN. "It could be really disruptive to partners if everyone goes to their battle stations."

Smeltzer said Cisco reducing its ownership stake in VCE could be the result of the rivalry between Cisco and VMware in the emerging software-defined networking (SDN) market.

"Maybe it is signaling that this rift that has been rumored between EMC and Cisco is real," he said.

Cisco, EMC Execs Say Relationship Still Strong

Shannon Champion, business development manager at Matrix Integration, a Jasper, Ind.-based Cisco partner, also said he wouldn't be surprised if the change in VCE ownership had to do with the friction between Cisco and VMware.

"I'm not surprised, I guess, since VMware was such a big piece of this mix, initially, on the Vblock systems. And with VMware moving away from the Cisco partnership with its own virtual switching … some fractures could definitely occur," Champion said.

Champion added that he could "absolutely" see Cisco making a big acquisition in the storage market as it reduces its investment in VCE. He said this would be critical for Cisco to compete against other players in the converged infrastructure market, such as Hewlett-Packard.

"Cisco itself has dabbled [in storage], but that's really the one thing they are missing to go head-to-head with players like HP," he said.

According to Cisco and VCE executives, the change in VCE ownership does not mean the EMC-Cisco ties are starting to fray.

"I believe Cisco is one of our top, top partners, and will remain a top, top partner," said EMC chairman and CEO Joe Tucci during a conference call with analysts Wednesday.

Cisco President and Chief Operating Officer Gary Moore later echoed Tucci's comments on a separate conference call Wednesday, saying the Cisco and EMC partnership is as strong as ever, and that Cisco plans to stay "strategically engaged" with VCE.

VCE, for its part, said in a statement that it remains committed to including Cisco products, such as its Application Centric Infrastructure and Unified Computing System, in the Vblock road map.

Although Cisco partners are waiting to see the networking titan's next move, most agreed that Cisco's reduced ownership stake will be a good move for VCE.

"They are a mature company now, and I think they will continue to have a strong relationship with Cisco," said Gary Alexander, owner of Alexander Open Systems, an Overland Park, Kan.-based Cisco partner. "I really don't anticipate it making too big of a difference."

"I think from a customer perspective, I believe VCE is stable," said Focus Technology's Smeltzer. "Customers probably won't see that much of a difference."