Cisco's EMC Venture: Better Than a Buyout?

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EMC is also unlikely to part with VMware absent a deal that also includes EMC itself, which has a market value of $33.8 billion, analysts and bankers say. "It would have to be a hell of an offer," says Eric Gebaide, a managing director at investment bank Innovation Advisors. "Cisco has probably been nosing around them," he says. But "VMware isn't going away as a company."

A Threat to IBM, HP, and Oracle

Buying VMware would put any potential acquirer more squarely in competition with Microsoft (MSFT), which has been including free virtualization software in its own server software. Microsoft released a new version of its virtualization software in October that includes a key feature that helps it compete with VMware. Microsoft is winning more than 20% of deals for server virtualization software, general manager Zane Adam says.

VMware's business also poses a threat to IBM, HP, and Oracle (ORCL), which benefit from sales of more servers. VMware's strategy "is in everybody's face," says a tech company CEO who asked to remain anonymous. "Cisco and VMware have a strong relationship because Cisco doesn't have a dog in the hunt in the data center [server business]. I don't think anyone else likes this strategy."

Cisco certainly has the currency for large acquisitions. It had $35 billion in cash and short-term investments at the end of July, and in October it said it agreed to buy video conferencing company Tandberg and networking company Starent Networks (STAR). Cisco reports its fiscal first-quarter earnings Nov. 4. During the press conference with EMC Chief Executive Joseph Tucci and VMware CEO Paul Maritz, Chambers even said he wouldn't mind having a larger stake in VMware. Cisco owns 1.6% of the company.

Three-Way Deal

Robert Lloyd, executive vice-president of worldwide operations at Cisco, says it's "entirely speculation" that Cisco has inquired about VMware's availability, and says Cisco prefers smaller acquisitions. "We like to acquire small and partner big," he says.

For now, Cisco's top brass will need to be content with a three-way deal among Cisco, EMC, and VMware that may be headache enough for competitors. Cisco is betting that networks will be at the center of new innovations in the tech industry, much as technology from IBM and Microsoft was in previous decades. Virtualization and networking are central to "cloud computing," a shift toward tapping computing power remotely, via networks, rather than in-house.

As industry growth has slowed, tech companies are increasingly moving into one another's territory. In March, Cisco announced a computer called the Unified Computing System that competes with products from IBM, HP, and others. IBM announced a partnership with Cisco rival Juniper Networks (JNPR) in April. And software company Oracle is attempting to close a $7.4 billion acquisition of Sun Microsystems (JAVA) amid opposition from the European Union. "We've talked about this clash of the tech titans all year," says Pacific Crest's Bracelin. "This is evidence that this battle is intensifying."

Ricadela is a writer for BusinessWeek in Silicon Valley.

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