VMware's 'West Coast Offense'

Posted by: Aaron Ricadela on January 12, 2010

VMware’s purchase of Yahoo’s Zimbra e-mail software shows how VMware, under a management team led by former Microsoft executives, continues to diversify in the face of competition from their former employer.

Zimbra, which has more than 55 million users, lets VMware sell Web-based e-mail and calendar software that’s used by companies including H&R Block, Bechtel, and General Electric’s India division for use by their own workers. Internet Service Providers including Comcast and NTT Communications also offer Zimbra e-mail to their subscribers.

The acquisition, VMware’s second in five months, continues its trajectory toward building a portfolio of software that’s broader than the virtualization software for servers that’s propelled the company to a projected $1.97 billion in 2009 sales, according to a Bloomberg News estimate. Last August, VMware paid $420 million to buy SpringSource, a maker of programming tools for Java developers.

VMware hopes to use its programming tools and the new Zimbra e-mail software to create additional demand for its core virtualization software, which improves the efficiency of computer servers, says Chief Operating Officer Tod Nielsen. “We view this as a first step toward moving up the stack” toward more software applications.

Nielsen, VMware Chief Executive Paul Maritz, and Executive Vice-President Richard McAniff are all former executives at Microsoft, whose Windows Server products compete with VMware’s software. VMware is employing a strategy similar to the one Microsoft used to dominate the desktop computing market, adding software applications that can create demand for an underlying system. “Paul and I learned the West Coast offense,” says Nielsen. “We’re now at a new team, and there are some plays that work well.”

VMware didn’t disclose terms of the Zimbra deal, which is expected to close in the current quarter. Shares of VMware closed down 20 cents, or 0.45%, at 44.63 before the deal was announced. The acquisition won’t affect VMware’s 2010 sales or earnings, according to Nielsen.

Zimbra, which is distributed under an open-source license and competes with Microsoft’s Exchange program, has changed hands twice in recent years. In 2007, Yahoo paid $350 million for the software under former CEO Jerry Yang. Yahoo’s current CEO, Carol Bartz, has been shedding assets outside Yahoo’s core consumer business since taking the top job a year ago. Bartz has also cut Yahoo’s workforce by 5%.

When Yahoo bought Zimbra, it intended to improve its own Yahoo Mail software with the technology, as well as sell Zimbra collaboration software on a “white label” basis to businesses, says a Silicon Valley investor familiar with Yahoo’s purchase of Zimbra, speaking on condition of anonymity. When Yahoo decided to focus on its core consumer business, it decided to sell Zimbra in such a way that it would retain access to its software code to improve Yahoo Mail, while “divesting the business” of selling Zimbra to companies and universities. Selling to companies is a better fit for VMware’s sales force, this person says. “This is a great marriage.”

Nielsen says neither Yahoo’s nor Zimbra’s managers found the match between those companies satisfactory. “It didn’t really gel to where either one of them was pleased with the direction,” he says. A Yahoo spokesperson couldn’t be reached for comment.

VMware, which is majority owned by EMC, has grabbed a large share of the market for software that lets IT departments condense more computing work onto servers running Intel-compatible chips. The approach has saved companies money on computer hardware, power, and labor. But VMware is facing sharp competition from Microsoft, which includes competitive virtualization functions free in its Windows Server operating system.

Analysts surveyed by Bloomberg News expect VMware to report fourth-quarter sales of $551.5 million on Jan. 25, an increase of 7% from a year ago. Earnings per share are expected to fall to 26 cents, from 29 cents a year ago, excluding certain items.

VMware plans to retain all 110 Zimbra employees. Yahoo will continue to have access to Zimbra’s intellectual property for use in its e-mail and calendar software.

Buying Zimbra gives service provides that use VMware’s software another product to sell their customers, says Jefferies & Co. research analyst Katherine Egbert, who has “hold” rating on VMware shares. But she calls the deal a “strange fit” for the company. “It’s not a natural extension of VMware’s business,” she says. “But it speaks to their strategy.”

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BusinessWeek writers Peter Burrows, Cliff Edwards, Olga Kharif, Aaron Ricadela, Douglas MacMillan, and Spencer Ante dig behind the headlines to analyze what’s really happening throughout the world of technology. One of the first mainstream media tech blogs, Tech Beat covers everything from tech bellwethers like Apple, Google, and Intel and emerging new leaders such as Facebook to new technologies, trends, and controversies.

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