VMware dials up Desktone

Contact: Scott Denne

VMware picks up desktops-as-a-service company Desktone as the virtualization pioneer faces a slowdown in its core business. As we noted earlier, VMware’s software licenses grew by only $20m through the first half of the year, well below the $200m pace it set for itself for 2013, and this deal indicates that it’s looking toward services to partially offset that lost growth.

While VMware’s last few deals have been aimed at extending its core infrastructure technologies into related areas such as networking, storage and systems management, the acquisition of Desktone, along with the release of vCloud Hybrid Service earlier this year, show VMware emphasizing its ambitions to be a cloud services vendor, not just a cloud tools provider.

Desktone was funded with $29m in venture capital across two rounds, with the most recent coming it 2010. That same year the company brought in a new CEO, Peter McKay, and changed its business model to offering the virtual desktop service directly to customers – going from a business with almost zero sales to one that now has about 150 direct and service-provider customers and anticipates hitting profitability this year. (We’ll have a more detailed report on this transaction in our next 451 Market Insight.)

Our own estimates of the virtual desktop market put it at $3.8bn this year and growing at 21.9% annually. By our own back-of-the-envelope calculations, Desktone will likely account for roughly $10-$14m of that market this year.

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A ‘betwixt and between’ VMware opens the doors at VMworld

Contact: Brenon Daly

Even though it’s only 15 years old, VMware is beginning to look decidedly middle-aged. The virtualization kingpin, which opens its annual users’ conference today, is no longer the flashy young startup that was nearly doubling sales each year in the middle part of the previous decade. Nor is it (by any means) a tech dinosaur, defensively trying to protect its past successes while knowing full well that its best days are behind it.

Instead, VMware finds itself betwixt and between. And fittingly for a company in an indistinct period of its life, there’s uncertainty around its business. That is cascading through not only the operations of the company, but also its very identity. As it kicks off VMworld in San Francisco, VMware is still working through a restructuring, which, among other things, has seen it cut 800 jobs and divest a handful of businesses so far this year.

As one illuminating example of the uncertainty around VMware and its business, consider the company’s license sales, which are the lifeblood of any software firm. Back in the beginning of the year, VMware projected roughly 10% license growth for 2013. Off a 2012 base of about $2bn in license sales, that would imply roughly $200m of new VMware licenses sold this year. Through the first two quarters of the year, VMware has added a grand total of just $20m in additional license revenue.

The problems from the vendor’s flatlining software sales are exacerbated by the fact that it has whiffed on a few of the businesses that it acquired with the hopes of spurring growth in new markets. Misguided acquisitions such as Zimbra and SlideRocket took VMware further away from supplying technology to power datacenters and into the hotly contested consumer application market. VMware has sold off both of those businesses, along with three other divestitures so far in 2013. On the other side, it has bought only one company this year.

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Bye-bye Ballmer

Contact: Brenon Daly

Lost in the schadenfreude and snark that has accompanied Steve Ballmer’s decision to leave the top spot at Microsoft within a year is one undeniable piece of his legacy: No other tech CEO has accumulated as many assets in key markets as Ballmer.

In addition to the fat-margin franchises that Ballmer inherited, he steered the company on an M&A program that built up offerings around growth markets such as mobility, cloud infrastructure, data warehousing, online communications, digital advertising, collaboration and beyond. During Ballmer’s 13 years running the software giant, Microsoft dropped more than $25bn on its acquisitions.

Of course, there have been M&A missteps. The company has endured big write-offs (aQuantive), gotten burned by targets with dubious accounting (FAST Search & Transfer), drastically overpaid on other acquisitions (Skype), and has seen the period for returns on deals drag beyond a decade (Great Plains Software, Navision).

But in the end, Microsoft has at least brought together a basket of offerings, built on in-house and acquired technology, that makes it relevant in today’s tech market. Want proof of that? Microsoft is actually increasing sales. Granted, it’s only about 5% growth, but at least Microsoft is growing. The same can’t be said for IBM or Oracle or Intel or Dell or Hewlett-Packard. (Oh yeah, and Microsoft is growing while also throwing $20bn to the bottom line each year.)

From our perspective, one of the main challenges for Microsoft’s next CEO will be realizing a return on all of its previous dealmaking. Ballmer’s M&A program has put the pieces in place, but for the most part, they have been underutilized. It’s time for an execution-focused chief executive to wring more value out of the enviable collections of assets that Microsoft has already acquired.

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IBM shores up its mainframe technology with CSL buy

Contact: John Abbott, Tejas Venkatesh

IBM still occasionally feels the need to make acquisitions that supplement and update (or sometimes help protect) its venerable mainframe technology, even though the mainframe is mature to say the least, with nearly 50 years of history behind it. This time IBM has reached for CSL International, an Israeli company that specializes in virtualization management technology for the zEnterprise mainframe. IBM is seeing strong growth in Linux deployments on its mainframes, and virtualization management makes mainframes a viable platform for hosted cloud services.

CSL is privately held and terms were not disclosed, though Globes reported the value at roughly $20m. That appears reasonable given that nine-year-old CSL is a small company with less than 10 employees. The company’s CSL-WAVE software – which has been piloted at a large US government agency and has been deployed at several financial services firms – is intended to simplify the management of z/VM (the mainframe’s native hypervisor) when used in combination with Linux on System z – and nowadays just about every mainframe that ships includes Linux as well as the proprietary z/VM operating system. CSL has partnered with IBM in the past, but also has a partnership with CA Technologies, the future of which may now be uncertain.

CSL-WAVE is a drag-and-drop tool for creating, monitoring and managing virtual servers and connecting them with CPU, memory, storage and networking resources on the mainframe. The acquisition is a response to the rapid growth in Linux deployments on the mainframe – IBM reports that shipped capacity just about doubled year-over-year in the first quarter of 2013. Easier virtualization management for Linux also makes the mainframe a more viable platform for hosting cloud services. IBM touts the efficiency of running large numbers of virtual machines on the mainframe as its architecture enables very high utilization rates, approaching 100% of computing resources able to be utilized. Virtualization was pioneered on the mainframe architecture back in the 1960s.

IBM’s previous mainframe-related acquisition was that of Platform Solutions in July 2008. That deal was more about protection than advancing the technology. Platform had revived the concept of ‘plug-compatible mainframes,’ advocating the running of IBM’s z/OS on non-IBM hardware. It was fighting a legal battle with IBM at the time of the acquisition.

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Mellanox buys Kotura for its interconnects

Contact: John Abbott, Tejas Venkatesh

New workload demands from large-scale Internet datacenters are driving M&A activity around interconnects, which are required to move large virtual workloads from server to server. Mellanox Technologies is the latest vendor to buy in this market, announcing on Wednesday an agreement to acquire Kotura for $82m in cash. Mellanox plans to use Kotura’s technology and patents to build end-to-end interconnects for datacenters, supporting 100Gbps Ethernet protocols.

Kotura designs, manufactures and markets application-specific silicon photonics circuits. Silicon photonics technology promises to provide a low-cost, high-performance means of connecting standard system modules together into more fluid pools of system resources. Nine-year-old Kotura raised $39m in venture capital funding from ARCH Venture Partners, ComVentures and other firms.

Mellanox will pay $82m in cash for Kotura, and expects to assume approximately $8m in equity awards. While respectable, our understanding of the price-to-sales valuation for Kotura does fall below what we estimate Lightwire received in its $271m acquisition by Cisco. (Subscribers to The 451 M&A KnowledgeBase can view our estimated revenue for Kotura here and for Lightwire here.)

Demand for datacenter interconnect vendors appears to be growing, as evidenced by a handful of relatively rich exits announced in the past two years. Intel is particularly interested in this market, having reached for Fulcrum Microsystems, Cray’s HPC interconnect hardware assets and QLogic’s InfiniBand assets.

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Rackspace acquires freshly launched ObjectRocket

Contact: Tejas Venkatesh

Rackspace has acquired MongoDB hosting specialist ObjectRocket, expanding its portfolio of database services to non-relational data. The move adds a NoSQL cloud database offering, and should improve Rackspace’s ability to compete with Amazon Web Services.

ObjectRocket launched January 15, just 42 days ago. The company had only raised a round of seed funding from an undisclosed set of investors. ObjectRocket’s cofounder and chief architect Kenny Gorman is one of only 35 MongoDB contributors and community members considered MongoDB Masters.

ObjectRocket is differentiated by a managed services approach, advanced features and focus on high performance. The deal is a natural fit for Rackspace, which already offers MySQL-based Cloud Databases for relational applications. Bringing ObjectRocket onboard adds the ability to support non-relational operational applications, for which MongoDB is emerging as the primary NoSQL database of choice. We’ll have a full report on the transaction in our next Daily 451.

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The top tech deal of 2012: VMware-Nicira

Contact: Brenon Daly

With 2012 winding down, it’s time to look back over the year to see what stood out in what’s shaping up to be a tough year for tech M&A. As we always do in our annual survey, we asked corporate development executives to cast their vote for the most significant transaction of the year. For 2012, they overwhelmingly tapped VMware’s acquisition of Nicira as the Tech Deal of the Year.

Certainly, the $1.3bn transaction had a number of intriguing aspects. It’s a big price – $1.3bn is about the same amount that VMware has spent on its entire M&A program since being partially spun off from EMC. And it’s a bold move, even at the cost of picking a fight with longtime friend and networking ally Cisco Systems. But if VMware can have even part of the success in virtualizing networking with Nicira that it has already had by virtualizing computing, the acquisition will pay for itself many times over.

All of those elements figured into the corporate dealmakers handing the Golden Tombstone for 2012 to VMware. And, we should note that after two consecutive years of tight races, the voting in 2012 wasn’t even close. Twice as many survey respondents picked VMware-Nicira ahead of this year’s second-place transaction, Facebook’s reach for Instagram.

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EMC lays out a ‘Pivotal’ plan

Contact: Simon Robinson, Brenon Daly

Those wondering what ex-VMware chief Paul Maritz would end up doing as head of EMC strategy now have part of an answer: he’s going to run the Pivotal Initiative, what looks like a pending spinoff that brings together a number of ‘big data’ and cloud assets that EMC and VMware have developed and acquired in recent years. This new, 1,400-person organization (600 from VMware and 800 from EMC) will be ‘formally united’ by mid-2013, though the operational structure has yet to be determined.

At the core of the move is a desire to help EMC and VMware better capitalize on the effects that cloud computing is having on the application development and big data markets, with ‘new levels of focused investment.’ The initiative is centered on EMC’s Greenplum and Pivotal Labs, VMware’s vFabric (including Spring and GemFire), Cloud Foundry and Cetas, as well as other unspecified groups. Moving these assets into a single division also will allow both EMC and VMware to focus on their core businesses.

The planned joint venture continues the ongoing shuffle of assets between the parent company and its subsidiary. Since EMC sold a minority stake of VMware to the public in mid-2007, the company has sold at least two businesses to VMware. In early 2010, EMC divested its Ionix unit, with the service management unit finding a home in vCenter. A little more than a year later, the enterprise storage giant (quietly) sold its consumer online backup business, Mozy, to VMware.

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Brocade adds virtual routing capabilities with Vyatta buy

Contact: Ben Kolada

To add virtual networking to its storage portfolio, Brocade announced on Monday the all-cash acquisition of software-based virtual routing vendor Vyatta. The deal announcement reads as a tech and talent tuck-in, though it does also provide access to several Vyatta customers that are already implementing virtual networking.

Vyatta provides network routing, load balancing, address management, quality assurance, monitoring, administration and debugging software and hardware for businesses globally. Its software is used to manage both physical and virtual networks. The company started out with a virtual networking product with not only open APIs, but also open source software (Vyatta means ‘open’ in Sanskrit).

Brocade explained that the rationale for the deal was to complement its R&D investments in Ethernet fabrics and software-defined networking. But the enterprise networking and storage provider could also use Vyatta’s foothold in the virtual world to anchor its next steps. With the Vyatta buy, Brocade gains access to a set of customers that are already well along in their virtual networking implementations.

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VMware’s aggressive M&A of disruptive technologies

Contact: Brenon Daly

One of the highest compliments that can be paid to any technology company is to call it ‘disruptive.’ And by both organic and inorganic means, VMware has certainly earned that accolade. That’s on top of the more than $40bn of market value that it has also earned.

Starting with its homegrown server virtualization (a radically disruptive technology to the server industry), VMware has steadily expanded into other markets through M&A. Along the way, we’ve seen that at the root of disruption is conflict, with VMware’s acquisitions putting it on a collision course with vendors of various sizes in various markets.

For instance, VMware has taken some shots at Microsoft through purchases such as Zimbra and SlideRocket, which take aim at Microsoft cash cows Exchange and PowerPoint, respectively. More recently, VMware dropped $1.26bn on Nicira, a deal that could threaten Cisco Systems and other networking providers because Nicira’s technology effectively virtualizes networks.

And earlier this week, VMware bolstered its log management/analytics business by picking up Log Insight. The acquisition is a bit of an elbow jab at Splunk, which has collected a sky-high market capitalization of nearly $3bn as the market leader in log management/analytics. Of course, it’s important to keep these tussles in perspective – Splunk is still a Gold Sponsor at VMworld later this month.

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