A rumor has been circulating that Cisco may be interested in acquiring [t]VMW[/t]:
RPT-DEALTALK-VMware a compelling pursuit for Cisco
Wed Feb 11, 2009 9:39am EST
By Anupreeta Das
NEW YORK, Feb 11 (Reuters) - Cisco System Inc's (CSCO.O: Quote, Profile, Research, Stock Buzz) pursuit of virtualization software maker VMware Inc (VMW.N: Quote, Profile, Research, Stock Buzz) could be more serious than many on Wall Street believed, as the network equipment maker searches for new sources of growth.
Cisco has long coveted VMware, whose software helps computer servers run more efficiently and frees companies from having to maintain huge data centers. It went so far as to hold informal talks last summer to buy VMware's parent EMC Corp (EMC.N: Quote, Profile, Research, Stock Buzz) according to a person familiar with the matter.
The companies did not move into formal negotiations, and tight credit markets make financing the purchase of a $25 billion company difficult these days. But things could change quickly if EMC decides to put VMware on the market.
"This is a logical deal to do," said a West Coast technology banker. "The question is, is it strategically compelling enough in this environment?"
Spokesmen for Cisco and EMC declined comment.
Virtualization is considered a hot technology that is changing the way companies store and manage their data. For Cisco, VMware could bring in a new source of revenue as the maker of switches, routers and other equipment -- the plumbing that manages much of Internet traffic -- faces maturing markets across its products and services.
VMware has a market value of $10 billion, a far easier sum for Cisco shareholders to swallow than a bid for the whole of EMC, the world's largest maker of corporate data storage gear. Cisco already owns 1.7 percent of VMware's common stock.
EMC previously said it had no plans to sell or spin off its 84 percent stake in VMware, but executives are expected to give an update on their strategy at a Mar 10 investor meeting.
Cisco Chief Executive John Chambers has said he plans to be acquisitive through the economic downturn. The company has about $29 billion of cash and securities, and on Monday launched a surprisingly large $4 billion debt sale.
Analysts speculated that Cisco could be building a war chest for a large acquisition such as EMC, but a person familiar with the network gear maker's thinking said Cisco was just being "opportunistic" in tapping capital markets.
"They're taking advantage of low interest rates, and figuring they might as well get the money while it's there," this person said, adding that it was unlikely the debt issue is tied directly to any plan for EMC. The source was not authorized to speak publicly on the matter.
Rumors that Cisco could be interested in buying EMC to get its hands on VMware pushed EMC shares up 6 percent to $14.92 on July 30. The stock has since fallen amid concerns about global technology spending. It closed at $11.92 on Tuesday.
It is unclear whether EMC and Cisco discussed a price or terms during their conversations last summer, the person familiar with the matter said.
CISCO, EMC AND VMWARE: LOVE TRIANGLE
EMC bought VMware in 2003 for $635 million, and owns 84 percent of the software maker after spinning the remainder out into a public company in 2007. VMware was the hottest technology stock that year.
It has since lost its shine due to slowing growth rates and increased competition from lower-cost products from Microsoft Corp (MSFT.O: Quote, Profile, Research, Stock Buzz) and Citrix Systems Inc (CTXS.O: Quote, Profile, Research, Stock Buzz).
That could be one concern for Cisco if it goes after VMware or EMC, because the network equipment maker would be entering into competition with companies that traditionally have been among its biggest customers and partners.
Cisco, which supplies networking services for large enterprises, collaborates with software companies and other big technology players including Hewlett-Packard Co (HPQ.N: Quote, Profile, Research, Stock Buzz) and International Business Machines Corp (IBM.N: Quote, Profile, Research, Stock Buzz).
"If Cisco buys just VMware, it's declaring war on Microsoft," said the West Coast technology banker. "If Cisco buys EMC, then they're declaring war in a very big way with HP and IBM."
With Cisco's debt issue this week fueling deal speculation, the person familiar with Cisco's thinking said the company has plans for small and medium-sized acquisitions.
Cisco has launched a debt offering only one other time in its history: in 2006, to finance its $7 billion acquisition of television set-top box maker Scientific-Atlanta.
"Could it happen in 2009? Possible," said another technology banker of a Cisco-VMware deal. "But you'd have to see greater comfort that the economy is turning, and VMware would have to be separate from EMC so that it's not a $30 billion plus acquisition." (Additional reporting by Ritsuko Ando and Jim Finkle in Boston; Editing by Derek Caney)
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