Category: virtualization

Increasing cloudiness

Brenon Daly

Contact: Brenon Daly

Just three weeks after VMware inked its company-defining acquisition of SpringSource, the virtualization kingpin is throwing the doors open on its annual VMworld conference today. (We can only hope that those attending the get-together found it smoother than those trying to access the conference through the website. For much of Monday morning, pages on the VMworld site were unavailable due to ‘temporary maintenance.’ With our tongue planted firmly in cheek, we might suggest that they need to add some additional server capacity.)

Although known primarily for its virtualization software, VMware’s purchase of SpringSource indicates that it sees much of its future growth coming from ‘cloud computing.’ To show just how serious the company is taking this, consider that VMware is spending roughly twice as much on SpringSource as it spent, collectively, in the dozen deals it had done before picking up the open source application development startup. The VMware-SpringSource transaction is also, we would argue, the most important cloud computing deal so far.

As a concept, cloud computing is a relatively new term, but one that has caught on strongly in the tech industry. Consider that a search of ‘cloud computing’ in our 451 M&A KnowledgeBase returns 36 deals already this year, up from just eight transactions in all of 2008. Before last year, there were no instances of the term in our M&A database, which has more than 20,000 technology deals going back to the beginning of 2001.

Of course, some of that can be chalked up to the fact that cloud computing is a pretty vague and sprawling term, covering everything from infrastructure management to storage to security to hosting and other areas. To help get some clarity around what can be an otherwise opaque topic, The 451 Group will be hosting its own conference on Thursday called ‘Cloud in Context.’ The half-day event in San Francisco will feature end users discussing working in the cloud, innovative startups and (for the first time ever) the release of our own estimates and projections for the cloud computing market. More details on ‘Cloud in Context’ can be found at the conference website.

VMware: a ‘table-clearing’ bid for the clouds

Brenon Daly

Contact: Brenon Daly

About a year and a half after Paul Maritz got picked up by EMC, the former Microsoft honcho has struck his signature deal for his new employers. When EMC reached for Pi Corp, which had yet to release a product, we figured the move was basically ‘HR by M&A.’ And that has turned out to be the case, as Maritz took over leadership of EMC’s virtualization subsidiary VMware in July 2008. He stepped into the top spot just as VMware’s once-torrid revenue growth had dwindled to a trickle. Sales at VMware rose 88% in 2007 and 42% in 2008, but are projected to inch up just 2% this year.

To help jumpstart VMware’s growth, Maritz looked to the clouds, pushing through the acquisition of SpringSource earlier this week. At roughly twice as much as VMware has spent on its previous dozen deals, the SpringSource buy is the virtualization kingpin’s largest purchase. It was also, as we understand it, a deal very much driven by Maritz. (Because the purchase topped $100m, it also had to be blessed by VMware’s parent, EMC. This indicates that Maritz enjoys a level of support at the Hopkinton, Massachusetts, HQ that probably wasn’t extended to his predecessor, VMware founder Diane Greene.)

As we have noted, no bankers were involved in negotiations and one source indicated that terms were hammered out directly by Maritz and his counterpart at SpringSource, Rod Johnson, in a scant three-and-a-half-week period. Not that there was much negotiating needed. As we understand it, Maritz approached Johnson with a ‘table-clearing’ offer of $400m. SpringSource didn’t contact any other potential buyers, and in fact, the five-year-old startup only weighed VMware’s bid against the possibility of going public in 2011. (Subscribers to the 451 M&A KnowledgeBase can click here to view our estimates on SpringSource’s revenue, both trailing and projected, as well as its valuation.)

However, the source added that getting to an IPO would have likely required another round of funding for SpringSource. The dilution that would come with another round, combined with the deep uncertainty about the direction of the equity markets, tipped SpringSource toward the trade sale. In the end, that decision – and how Maritz executes on his step into application virtualization – will go a long way toward shaping his legacy at VMware.

EMC and advisors: All or nothing

Brenon Daly

Contact: Brenon Daly

After EMC doled out no fewer than nine credits to different banks for working on its acquisition of Data Domain, we were curious how the deal credits would flow around the largest-ever purchase by EMC subsidiary VMware. (The unusually long list of advisers for EMC on Data Domain made us think – of all things – about the quip about compensation under some communist regimes: People pretended to work and the government pretended to pay them.) As it turns out, EMC/VMware swung to the other extreme, with not a single bank working for the virtualization giant in its purchase of SpringSource.

That’s not unusual, since VMware hadn’t really used bankers in the dozen or so acquisitions that it had inked before SpringSource. But those deals were mostly small. In fact, the cumulative spending for all of its earlier buys totals only about half of the $420m in cash and stock that VMware is set to hand over for SpringSource. By our tally, VMware’s pending purchase is the third-largest pickup of a VC-backed tech firm so far this year. Not that the print will show up for any bank. SpringSource didn’t use an adviser, either.

A (Big) Blue-colored Sun?

Brenon Daly

Contact: Brenon Daly

Just two days after Cisco took the fight to its longtime allies in the server wars, IBM is now looking to buy some ammunition of its own. Big Blue is reportedly mulling a $6.5bn bid for Sun Microsystems, according to The Wall Street Journal. The deal would be the largest tech transaction (excluding telecom M&A) since Hewlett-Packard jabbed at IBM’s giant services division, paying $13.9bn for EDS last May. If it comes to pass, a pairing of IBM and Sun would also radically change the battle lines in the broader fight to build out datacenters, specifically around server, storage and software offerings.

Take the server market. If the deal goes through, a combined IBM-Sun would dominate the high-end, RISC-based, Unix-based symmetrical multiprocessor server market, leaving HP a distant third. However, one point that might pose a challenge for Big Blue is how long it would want to continue with Sun’s Sparc architecture, a direct clash with its own Power chips and System-p servers. Turning to storage, IBM is probably less excited about Sun’s assets in that market. Sun’s storage business has been languishing in the doldrums for years, despite Sun supporting it with its largest-ever acquisition, its mid-2005 purchase of StorageTek for $4.1bn in cash. Nonetheless, there are probably enough enterprise customers locked into Sun’s high-end, mainframe-centric tape business to interest Big Blue. And in software, IBM and Sun are both committed to open source, although we would add that they have slightly different models for monetizing their investments there.

Of course, there’s a chance that the reported talks may not result in a deal. However, we would note that Sun shares are behaving as if it will go through, soaring nearly 80% in early Wednesday afternoon trading to $8.80. That’s essentially where they were last September. That fact probably won’t be lost on Sun’s largest shareholder, Southeastern Asset Management. The activist investor, which has indicated that it talked with Sun to explore a possible sale of the company, among other steps to ‘maximize shareholder value,’ holds some 20% of Sun stock, according to its most-recent SEC filing.

Real deal for Virtual Iron?

Brenon Daly

Contact: Brenon Daly, Rachel Chalmers

Several sources, both from industry and financial circles, have indicated that server virtualization startup Virtual Iron Software is nearing a deal to sell to a strategic buyer. The name at the top of the list? Oracle, which has a Xen-based hypervisor (OVM), but lacks management tools. Virtual Iron would bring Xen management.

Another name that has surfaced is Novell. A year ago, the company handed over $205m for PlateSpin, which was its largest virtualization acquisition and one that valued eight-year-old PlateSpin at roughly 10 times its revenue. Virtual Iron would fit well with Novell’s virtualization efforts as well as with its open source leanings (Virtual Iron is based on Xen).

Sometimes viewed as a ‘down-market VMware,’ Virtual Iron sells primarily to SMEs through its channel. The Lowell, Massachusetts-based company has raised some $65m in funding since its founding in 2003. Backers include Highland Capital Partners, Matrix Partners, Goldman Sachs Group and strategic investors Intel Capital and SAP Ventures.

We understand that Virtual Iron had somewhat ‘frothy’ expectations after Citrix paid a half-billion dollars for XenSource in mid-2007. However, sources say Virtual Iron won’t get anywhere near the valuation of XenSource. In fact, most folks have doubts that the company will even sell for the amount of VC dollars that went into it.

Quest shops again, virtually

Brenon Daly

Contact: Simon Robinson, Brenon Daly

A year after closing a deal with Vizioncore that got Quest Software into the storage virtualization market, the company went shopping again this week. The systems management company picked up some of the assets of venture-backed MonoSphere, most notably its Storage Horizon product. This is a storage analysis and reporting tool designed to help storage managers assess the capacity optimization of their existing multivendor arrays so they can reclaim unused capacity and project future requirements more accurately. Storage Horizon will slot into Quest’s portfolio for managing storage in virtualized server environments, which is currently sold under the vOptimizer Pro brand.

As part of Quest, MonoSphere may well have the opportunity to deliver on the promise of its technology. (It was that potential that attracted some $41m in backing from Intel Capital, ComVentures and Lightspeed Venture Partners.) On its own, MonoSphere didn’t have much to show for itself. That’s a familiar story concerning other storage-reporting specialists, which often find that large enterprises are hesitant to buy such tools from small vendors, especially when their existing suppliers are happy to offer similar functionality for little or no cost. But with Quest, which counts more than 100,000 customers and expects to report some $730m in 2008 revenue, MonoSphere may be able to land customers that had previously slipped through its hands.

Another security buy for VMware?

Brenon Daly3 Comments

Although the knickknacks have long since been packed up from VMworld earlier this month, one rumor continues to make the rounds. Several sources have indicated that VMware, the host of VMworld in Las Vegas, has acquired startup Blue Lane Technologies for about $15m. The two companies have been technology partners for more than a year, with Blue Lane’s VirtualShield integrated with VMware’s VirtualCenter.

Security and virtualization in general have been major concerns for VMware. To help shore up the hypervisor and broader virtual environment, VMware in March introduced VMsafe, a set of APIs that third-party security vendors can use to write interoperable programs. Blue Lane was one of about 20 initial partners in VMsafe, as were the security industry’s heavyweights.

If indeed Blue Lane has been acquired (as one industry source and two financial sources reveal is the case), then it marks the end of a company that got its start more than six years ago. When we initially checked in with the vendor shortly after it rolled out its first product three years ago, the Cupertino, California-based company was shipping a patch management appliance. Along the way, it received some $18.4m in two rounds of funding. Remaining startups that are focusing on securing virtual networks include Catbird Networks and Reflex Security.

Selected VMware acquisitions

Date Target Price Rationale
June 2006 Akimbi $47.3m Testing and configuration
August 2007 Determina $15m* Hypervisor security
September 2007 Dunes Technologies $45* Workflow and orchestration
January 2008 Thinstall Not disclosed Application virtualization

Source: The 451 M&A KnowledgeBase *Estimated deal value

Citrix sits out

Brenon Daly

Since announcing its landmark acquisition of XenSource a little more than a year ago, Citrix has largely taken itself out of the M&A market. And don’t expect that to change anytime soon. CFO David Henshall told the Deutsche Bank Technology Conference earlier this week that the company ‘has its hands full’ with working out its virtualization strategy, which it grandly refers to as a datacenter-to-desktop offering. (That strategy largely reflects the fact that VMware, with an estimated 85% of the server virtualization market, isn’t as vulnerable as Citrix initially thought, at least around ESX.)

While Citrix has inked three deals since XenSource, the acquisitions have been quiet technology purchases. For instance, in January Citrix snagged a product line from FullArmor, a self-funded business process orchestration tool vendor, and in May it added Sepago, a 30-person company that only launched a product a year ago after a few years as a consulting shop.

Instead of spending on M&A, Citrix’s Henshall indicated that the company will continue to put much of the cash it generates ($75-100m each quarter) toward buybacks. If nothing else, Citrix has been getting a relative bargain in the buyback. After two straight earnings warnings earlier this summer, shares sank to their lowest level in almost three years. Around that same time, perhaps not coincidentally, rumors began to surface that Cisco or IBM might be shopping Citrix. If Citrix does get acquired, we still think the deal will flow through Redmond, with Microsoft to reach for its longtime partner to shore up its own virtualization offering.

Citrix deal flow

Year Deal volume Deal value
2008 2 Not disclosed
2007 5 $500m
2006 3 $117m
2005 2 $338m

Source: The 451 M&A KnowledgeBase

Buying and building at Google

Brenon Daly

Since the beginning of 2007, Google has spent nearly $3.5bn on research and development. The freewheeling company, which makes liberal use of the ‘beta’ tag for many of the in-house projects it rolls out, often goes to great pains to present a corporate portrait of uninhibited engineers running wild on their whiteboards, coming up with the next Great Idea. (All the while, founders Sergey and Larry benevolently look on.)

With all the building going on at Google, it’s easy to lose sight of the fact that the company is also buying. In fact, since the beginning of 2007, Google has averaged about a deal a month. That’s about the same acquisition pace as both Cisco and Oracle over the last 18 months, although the sizes of the deals – and the rationale – are very different. Google, for instance, has never purchased a public company.

Instead of the consolidation plays inked by other large vendors, Google tends to pick up small bits of technology or even a team of engineers that the company can eventually turn into a product. Sometimes, the acquisitions show up directly in Google products, such as its mid-2005 purchase of Android Inc. At the time, Android was reportedly working on an operating system for mobile phones, which Google officially unveiled last November. Another example is Google’s purchase in November 2006 of iRows, which became the spreadsheet offering in Google Docs.

Other Google purchases show up only as features in more significant offerings. In May 2007, for instance, Google picked up GreenBorder Technologies, a small company with a fitful history and a doubtful commercial outlook, but some solid technology. Specifically, GreenBorder developed a virtualized browser session, which isolated any browser-based security threats from the user’s computer.

However, not much had been seen from this ‘sandbox’ technology over the past year. At least, not until Google rolled out its new Chrome browser on September 1. One of the key selling points of the would-be killer of Internet Explorer: security. According to Google, Chrome prevents malware from installing itself on a computer through a browser as well as by blocking one tab from infecting another tab. In our opinion, it won’t take many people switching to Chrome to justify the $20m-30m we estimate Google spent on GreenBorder for that acquisition to pay off.

Google deal flow

Year Deal volume
YTD 2008 3
2007 15
2006 11
2005 6
2004 3

Source: The 451 M&A KnowledgeBase

What’s brewing at Cisco?

Brenon Daly3 Comments

Although Cisco chief executive John Chambers has thrown cold water on speculation about a large acquisition, the market continues to buzz about possible deals by the networking giant. Observers who think Cisco is big-game hunting point to a number of unusual moves from the company, which – with a bit of reading between the lines – appear to suggest something big is brewing.

For starters, they point to the fact that Cisco has largely stepped out of dealflow, inking just two deals so far in 2008. (We recently noted Cisco’s conspicuous absence, just a day before it announced its $120m purchase of network device configuration vendor Pure Networks.) In comparison, this time last year Cisco had inked nine acquisitions. Additionally, Cisco has drastically scaled back its share repurchase program, perhaps suggesting the company is stockpiling cash for a big deal.

Of course, most of the rumors have concerned a possible pairing of Cisco and EMC, largely so Cisco could get its hands on VMware. (EMC sports a market capitalization of $30bn.) This comes on the heels of earlier rumors that Cisco might be looking at Citrix, largely so it could get its hands on XenSource.

We have a new name to toss into the Cisco M&A rumor mill: McAfee, which has a $6bn market cap. Speculation has recently surfaced that the networking company is eyeing the largest IT security pure play, a combination that would allow Cisco – for the first time – to have control over endpoints. It would pick up a solid portfolio of security products from McAfee, notably encryption and port and device control offerings, as well as potentially salvaging Cisco’s disastrous NAC effort. (And as an added bonus with the deal, Cisco could stick it to Symantec. Cisco has little love for Symantec.)

Whether a deal materializes, or even is being considered, we would expect Cisco to emphasize security much more in the future. It recently handed the division over to Scott Weiss, who came with the January 2007 acquisition of IronPort Systems. A VC who has invested in Weiss’ companies over the years (Weiss also ran Hotmail) said he wouldn’t be surprised if Cisco turned over the entire business to Weiss when Chambers decides to step down.