EMC Acquires VMware

VMware, a company that previously rejected a takeover bid from Microsoft, will operate as a wholly owned subsidiary of EMC, based in Hopkinton, Mass., and will continue to develop software that currently services 5,000 customers that use its server products and 2 million customers that use its desktop products. It has revenues of nearly $100 million and has been cash-flow positive for two years now, says Diane Greene, VMware's CEO.

This deal will broaden EMC's technology offerings more into the server realm, an area that EMC previously kept an arms-length distance by choosing to focus purely on its core competency: storage subsystems. But, like many storage vendors, the storage pioneer has been hit with declining price margins in hardware and has made some targeted moves to focus its business model more on software and services.

In July, EMC announced it acquired Legato Software, a backup and recovery software company, in a deal valued at $1.3 billion. Then in October, EMC came through with another merger. This time it purchased Documentum, a documents-management software company, in a deal valued at $1.7 million. The Documentum deal is expected to close Thursday, Dec. 18. Those two mergers helped EMC build up its information life-cycle management (ILM) strategy, a new trend in storage that demands storage technology become more flexible so that customers can store data based on its age and business value to a company.

By acquiring VMware, EMC executives say they can compete both in ILM as well as the On-Demand space, which currently is being spearheaded by IBM and Hewlett-Packard. It also means they can bring the "Holy Grail" of virtualization closer between storage and servers.

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"It's a breakthrough synergy in combining these two technologies," says Joe Tucci, EMC's CEO.

EMC takes on some interesting server virtualization technology with this merger. VMware, based in Palo Alto, Calif., has four major products: VMware VirtualCenter, VMware ESX Server, VMware GSX Server and VMware Workstation.

For example, the VMware ESX Server software enables IT managers to take a brand-new Intel-based server -- whether from HP, IBM or Dell -- and install this virtualization technology on it. Once that is done, IT managers can install multiple operating systems on that server through the creation of virtual machines. That means you can run up to 80 operating systems on that one server with minimal overhead impact on performance, says Mike Mullany, VMware's vice president of marketing.

"All those operating systems can run concurrently," Mullany says. Moreover, an IT manager can individually customize resources for each of those operating systems within that one server. CPU, networking bandwidth, disk access and real memory access can either be increased or decreased, depending on demand. The ESX Server software is used mainly for performance-intensive data center environments.

The GSX Server software, which is mainly used in testing and development environments, also has virtualization capabilities but differs from ESX. This software can be installed on an existing server (GSX must be installed on bare metal), so that multiple OSs can be configured. But there are some drawbacks: you don't get the ability to customize the internal resources, and you can only scale up to 40 virtual machines.

The VMware Virtual Center product, which is a management product that enables IT managers to manage a farm of virtual machines across the ESX server line, is the company's newest product. About 250 companies used it in beta testing and "most have converted to sales," Mullany says.

Tucci says the two companies have been working together for the past year-and-a-half. He offered an example of how the companies' technologies can work together. For instance, EMC's remote data mirroring software, called SRDF, can be coupled with VMware's Vmotion, an add-on module, enabling customers to do non-disruptive application failover. Vmotion allows users to take a virtual machine running a live operating system and relocate it to another physical server without interrupting service. EMC executives say this has implications in many areas, including business continuance and consolidation. Tucci says they have identified some 20 different solutions that EMC and VMware can create for storage and servers. They expect to make product announcements in the first couple of months of 2004.

"As we go, we will add more and more products," Tucci says.

Greene identified EMC as the best source to help them grow their business. Under this agreement, VMware's products will continue to be sold through their sales force and its partners, which include IBM and HP. In the case of these two companies, VMware's products are sold through the channel.

Both Tucci and Greene assured financial analysts during an early evening Monday conference call, that those partnerships will continue. "I don't see that interrupted," Greene says. "We are going to keep right on doing that."

"Hopefully, we can be on the integration side of what HP is doing with its Adaptive strategy and IBM with its On-Demand strategy," Tucci adds.

EMC's David Goulden will oversee VMware. Goulden, who is executive vice president of new business development, also has extensive third-party development partnerships with Veritas Software, IBM, Hitachi Data Systems, Computer Associates, Network Appliance, as well as Red Hat and Novell. Those relationships are expected to continue as before.

Tucci says that, as an acquisition, VMware has been on his radar for some time now. The initial plan was to forge a deal in 2004 but a certain unspecified situation caused "the moment of truth to move now."

"Storage will change more in the next three years than it did in the last decade," Tucci says. "And EMC is going to be a leader."