Could Cisco Buy VMware?

Cisco Systems (NASDAQ: CSCO) has long been rumored to be interested in acquiring EMC (NYSE: EMC). Now the networking giant may have narrowed its interest, according to reports.

Reuters reported earlier this week that Cisco’s pursuit of VMware (NYSE: VMW), which is 84 percent owned by EMC, “could be more serious than many on Wall Street believed.”

“Cisco has long coveted VMware,” said the Reuters report. “It went so far as to hold informal talks last summer to buy VMware’s parent EMC Corp., according to a person familiar with the matter.

“The companies did not move into formal negotiations, and tight credit markets make financing the purchase of a $25 billion company difficult these days. But things could change quickly if EMC decides to put VMware on the market.”

Data storage giant EMC has a market cap of about $24 billion, while its server virtualization subsidiary VMware has a market value of just under $10 billion.

But with $29 billion in cash and securities, a large acquisition isn’t out of the question for Cisco, particularly with stock market values suppressed by the worst economic downturn in decades. And Cisco tapped the debt markets earlier this week to the tune of $4 billion, which added to the speculation, although Reuters said Cisco was just taking advantage of low interest rates.

Analyst Kaushik Roy of Pacific Growth Equities said Cisco might be interested in acquiring VMware — but don’t expect EMC to be interested in selling.

“Is Cisco interested in VMware?” Roy asked. “Possibly yes. But will EMC sell it at this time and at these prices? Absolutely not.

“Is something imminent? Absolutely not,” he added, noting that EMC vice chairman Bill Teuber and storage division president Dave Donatelli recently sold shares. “If something is imminent, they wouldn’t have sold their EMC stocks now,” he said.

Roy said speculation that Cisco could buy all of EMC and split the company up would be “a financial engineering job of bankers, not of Cisco corporate development.”

Still, with around $30 billion to spend — which is more than even Microsoft’s (NASDAQ: MSFT) $20 billion cash hoard — Cisco could easily create some mischief.

But Roy pointed out that $26 billion of Cisco’s cash is overseas, and “cannot be brought back to the U.S. without a huge tax penalty.” Of course, Cisco could still issue shares to buy another company, he noted.

Enterprise Strategy Group senior analyst Brian Babineau said VMware “is EMC’s best asset and the only portion of its business that may grow in this difficult economic climate. We do not believe that EMC would consider spinning off or selling VMware at this time because asset valuations are very depressed. In addition, VMware is extremely strategic to EMC, as server virtualization increases storage capacity requirements, drives networked storage implementations and facilitates business continuity projects, all of which other parts of EMC’s business can benefit from.

“If Cisco wanted to own VMware, it would have to pay a significant premium or buy EMC along with it, with the latter being the more likely option, as the core EMC business could also help Cisco penetrate the data center,” said Babineau.

VMware shares are down by half from where they began trading in August 2007, and down 80 percent from their high reached two months later. EMC has repeatedly said that it has no plans to spin off the rest of its stake in the company.

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Paul Shread
Paul Shread
eSecurity Editor Paul Shread has covered nearly every aspect of enterprise technology in his 20+ years in IT journalism, including an award-winning series on software-defined data centers. He wrote a column on small business technology for Time.com, and covered financial markets for 10 years, from the dot-com boom and bust to the 2007-2009 financial crisis. He holds a market analyst certification.

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