Behind VMware's Buyout Binge
VMware continued its scorching acquisition binge this week with the announcement on Thursday that it's acquiring security company Carbon Black as well as cloud software company Pivotal for a total of about $5 billion. The deals reinforce VMware's laser focus on cloud management and security.
The prices were healthy: VMware will pay about $2.1 billion for Carbon Black and $2.7 billion for Pivotal. The deals are expected to close by January 2020. Both are public companies, with Pivotal receiving an offer of a 7% premium over its share price and Carbon Black getting a 14% premium over Wednesday's market price. Both companies are recent IPOs whose shares haven't done much since being on the public markets -- Pivotal, which was spun out of VMware in 2013, is being purchased for close to its 2018 IPO price. Carbon Black had an IPO at $19 a share in 2018.
Carbon Black is a straight all-cash purchase at $26 per share while the deal with Pivotal is more complicated, including a purchase of two share structures. Pivotal class A shareholders will get a $15 per share, while class B shares will be exchanged for the same class of stock in VMware at a rate of 0.0550 VMware shares per Pivotal share.
Pivotal's VMware Roots
Because Pivotal was spun out of VMware in 2013 and both VMware and Pivotal are majority-owned by Dell Technologies, the deal not only brings both companies back together in the Dell family but it will also have the effect of increasing Dell's ownership of VMware. Keeping track of the pieces of Dell's ownership structures is no easy task. Many believe that Dell Founder and CEO Michael Dell's ultimate goal is to own all of VMware, though VMware executives said this was not a motivation behind the deal.
VMware CEO Pat Gelsinger told CNBC that the two acquisitions will be immediately profitable once folded into VMware. Gelsinger said the new acquisitions will give VMware $3 billion in hybrid cloud and software-as-a-service revenue.
The deals look like a power play to roll up as much of the cloud management and security space as possible. VMware has been investing heavily in multi-cloud and hybrid cloud management, with a particular focus on using container applications, including Kubernetes, to help manage cloud workloads. Recent deals include the purchase of Heptio, CloudHealth, VeloCloud, and Bitnami. VMware executives have painted a picture of VMware owning all the software pieces for managing software and workloads across clouds.
Pivotal's Cloud Foundry, or PCF, is a product used to build, deploy, and operate cloud-based software. Pivotal also has Pivotal Container Service for managing Kubernetes in the cloud, which VMware and Google helped develop with Pivotal -- this will clearly be part of the puzzle VMware fills out in integrating with its other container management services such as Heptio.
Carbon Black focus on endpoint security and malware detection. There has been a flurry of fast-growing businesses in the cloud security space, highlighted by the the recent IPOs of Crowdstrike and Zscaler. The endpoint space in particular is crowded, including larger firms such as Symantec and Intel Security (McAfee) dominating and younger upstarts such as Cylance, which was acquired by Blackberry in 2018. There are also dozens of other competitors in the cloud-security space. VMware is particularly focused on using virtualization, including SD-WAN and cloud techniques such as micro-segmentation to improve cloud security. Look for VMware starting to build an end-to-end security solution from the heart of the cloud.
VMware Earnings
Oh -- and then there's this. VMware announced the deals on the day it also released earnings.
Revenue for the company's second fiscal quarter grew to $2.4 billion, up 12% from the prior year's quarter. Excluding a one-time tax gain and a $538 million write-down from previous investments in Pivotal, VMware reported non-GAAP income of $667 million up four percent from the previous year's quarter.
These are VMware's largest deals yet, and they appear to be focused on adding heft and profitability to its growing cloud franchise. One thing you can say about it: VMware is being very methodical and focused about how it attacks the cloud space. We expect to hear a lot more about it at its VMworld conference next week, in San Francisco.
The Futuriom annual SD-WAN Growth report includes a detailed analysis of the market growth drivers, customer needs, and the strategies of market leaders including VMware. You can find a summary of the report here.
