10 Things To Watch From The $2.1 Billion VMware-Carbon Black Deal

Here's a deep look at what attracted VMware to Carbon Black's endpoint security portfolio and how VMware plans to enhance Carbon Black's protection capabilities and go-to-market strategy.


Fortifying The Endpoint

Carbon Black has shifted strategy just 15 months after the company went public with its planned sale to VMware in a deal with an enterprise value of $2.1 billion. The deal will allow the Waltham, Mass.-based endpoint security vendor to serve as the anchor for Palo Alto, Calif.-based VMware's new Security Business Unit.

Carbon Black's stock is up 39 percent to $26 per share since reports first emerged Aug. 9 that negotiations were taking place to sell the company to a technology vendor. VMware agreed late Thursday to buy Carbon Black for $26 per share, which (excluding Friday) is higher than the company's stock had traded at any point since June 2018, just one month after Carbon Black went public.

Carbon Black CEO Patrick Morley sent a memo to company employees, and VMware CEO Pat Gelsinger spoke with investors Thursday about what the acquisition means for both companies, according to documents filed with the U.S. Securities and Exchange Commission.

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Here's a look at what Morley and Gelsinger had to say about what attracted VMware to Carbon Black's endpoint security portfolio and how VMware plans to enhance Carbon Black's protection capabilities and go-to-market strategy going forward.

10. Carbon Black Will Become VMware's Security Business Unit

VMware today has approximately 12 business units, and Carbon Black is set to become the company's Security Business Unit. Patrick Morley (pictured), who has served as Carbon Black's president and CEO since 2007, will become general manager of VMware's Security Business Unit.

Combining Carbon Black's offerings with VMware's existing security tools will create a modern security cloud platform for any app running on any cloud delivered to any device, according to Morley. VMware is looking to invest heavily in cybersecurity in hopes of disrupting the market, Morley said.

The deal is expected to close in the second half of VMware's current fiscal year, which ends Jan. 31, 2020. Until then, Morley said Carbon Black will be run as an independent company.

9. The Deal Will Help VMware Analyze App Workloads On The Server Side

VMware is already integrating Carbon Black's technology into vSphere in a capability announced as part of AppDefense, Gelsinger (pictured) said. VMware has therefore already taken and applied Carbon Black's core technology to analyze application workloads on the server side, putting the company in a unique position.

Gelsinger said the company had already been working with Carbon Black to enhance its AppDefense technology. VMware has also integrated AppDefense into vSphere, Gelsinger said, meaning that some of the company's vSphere revenue is now associated with security.

8. VMware Already Has Offer Letters For Three Top Carbon Black Execs

The transaction news changes nothing about Carbon Black's go-to-market strategy, with all 2019 targets and plans remaining as defined, Morley said. Executing against those targets is critical to proving that Carbon Black was a wise acquisition choice for VMware, according to Morley.

Carbon Black's existing organizational structure, go-to-market leadership team, and COO Thomas Hansen will remain in place after the deal closes, with Thomas reporting directly to Morley. VMware has submitted offer letters for Morley, Hansen and Chief Product Officer Ryan Polk, setting forth the terms and conditions of these executives' continued employment with VMware once the deal closes.

Morley said VMware remains highly focused on investing in products.

7. Existing Carbon Black Partner Contracts Remain In Effect

Partners will have the opportunity to leverage VMware's expansive global footprint to bring Carbon Black's technology deeper into the enterprise, Morley said. Partners should expect little to no impact during the transition period since VMware plans to keep existing agreements with Carbon Black partners in place.

Although formal notifications will be mailed to partners, Morley said contracts with the channel remain in effect and do not need to be redone or updated. And VMware's more than 70,000 partners will provide Carbon Black will a vast ecosystem to leverage, Morley said.

VMware and Carbon Black share a common view that partner networks are a critical part of each company's ongoing business, Morley said. The two sides therefore look forward to continuing to grow strong and collaborative relationships with partners, according to Morley.

6. The Deal Will Help Trim Fat From Bloatware Sitting On The Client

Customers today have a layer of fat from a variety of different bloatware products that sit on the client, and Gelsinger said the companies are anxious to fix that. Specifically, Gelsinger said the bloatware is slowing down the client andneeds to be patched and upgraded.

VMware plans to resolve this issue by bringing everything together and making it all part of the Workspace One agent, Gelsinger said.

Combining Carbon Black with AppDefense, Workspace One, NSX and SecureState will create a highly differentiated, intrinsic security cloud platform with extraordinary telemetry and network effects, Gelsinger said. VMware plans to create deep agentless integrations on the server workload side while collapsing endpoint management and endpoint security into an industry-first unified workspace tool.

5. VMware Is 'Very Satisfied' With Carbon Black's Technology, Move To Cloud

VMware did an in-depth analysis of Carbon Black's underlying technology during the due diligence process and came away very satisfied since the company is making the move to a cloud-delivered service and capability and growing its cloud offerings nicely, Gelsinger said.

In fact, Gelsinger said VMware has been de-risking this acquisition for the past two years since the two companies have been working together over that time around AppDefense. All told, Gelsinger said there's been a major shift in the characteristics of the cybersecurity market as transformation occurs and legacy players get disrupted.

Gelsinger compared the Carbon Black deal to the acquisition of AirWatch, which wasn't No. 1 at the time of acquisition but become No. 1 in the hands of VMware as the company improved its execution, scale and distribution. VMware firmly believes it can do that again with Carbon Black, Gelsinger said.

4. The Deal Will Give Carbon Black Massive Go-To-Market Leverage

Carbon Black will get massive go-to-market leverage through the acquisition thanks to channel distribution, penetration in the data center, and the enterprise reach of VMware, Dell and Secureworks, Morley said. VMware alone has more than 500,000 customers and approximately 70 million—or 85 percent— of the virtual machines deployed worldwide, according to Morley.

The combined organization will be uniquely positioned to deliver best-of-breed infrastructure management and security for workloads, endpoints and applications from device to cloud, Morley said. And the distribution and enterprise reach of VMware, Dell and Secureworks will boost the adoption of Carbon Black in the enterprise, Morley said.

VMware's partnership with Dell around endpoints will make it possible for Carbon Black to reach into markets that no other vendor has penetrated, according to Gelsinger. Customers are fundamentally looking for a different answer in this space, Gelsinger said.

3. The Acquisition Emphasizes Protection Over Detection, Response

VMware believes it is already an active participant in the security market at scale since between one-third and 40 percent of the company's NSX revenue is associated with security use cases, Gelsinger said. In addition, Gelsinger said vSphere and Workspace One are sold in many cases based on a security benefit.

Gartner estimates that 80 percent of security spend today is on detection and response capabilities even though investing in protection is four to five times more effective, Gelsinger said. The purchase of Carbon Black is part of VMware's effort to move the cybersecurity investment profile into a more efficient model of preventing incidents from ever occurring, according to Gelsinger.

The company's new Security Business Unit will combine Carbon Black's team with security investments and resources already under way from VMware's team, Gelsinger said.

2. Combining VMware, Carbon Black Will Radically Reduce Attack Surface

VMware has been organically building its NSX security capabilities with micro-segmentation for several years, Gelsinger said, and now plans to embed Carbon Black technology into that. The company has these capabilities on the workload, on the client and in the network, Gelsinger said, all of which produce telemetry.

As a result, Gelsinger said the company will have more access and more data when combined with the security cloud that Carbon Black is already operating. This torrent of higher-level data will allow Carbon Black to analyze at a scale that nobody else in the industry can achieve, Gelsinger said.

All told, Gelsinger said integrating Carbon Black with NSX and SecureState will radically reduce the attack surface by leveraging the company's unique and unrivaled position in workloads, in the network and on the endpoint. This will intrinsically prevent many sophisticated attacks as well as automate threat response, Gelsinger said.

1. The Deal Will Give Carbon Black A More Competitive Endpoint Protection Tool

Being acquired will increase Carbon Black's competitiveness in the endpoint protection market thanks to VMware's plans to invest in the company's technology and people, Morley said. The transaction will enhance Carbon Black's position in the competitive endpoint protection space by making it possible for the company to bring protection to devices and clouds in a way that competitors cannot, he said.

The transaction will not change anything about Carbon Black's mission to lead the next phase of the endpoint protection market, Morley said. VMware told the company multiple times during the negotiation process that it was excited to work with Carbon Black's technology, but even more excited about working with its people, according to Morley.

The acquisition changes nothing about Carbon Black's product strategy or road map, Morley said. If the transaction is approved, Morley said meetings and plans for future phases would include the updated corporate vision and mission.