EMC Adds Hybrid Cloud Management in Virtustream Acquisition

27 May 2015 | Author: | No comments yet »

EMC Buys Virtustream as Cloud M&A Heats Up; Bulls Positive on the Deal.

EMC Corp. agreed to buy Virtustream Inc. for about $1.2 billion, letting clients of the storage-systems maker run products from Oracle Corp., Microsoft Corp. and SAP AG in the cloud. Shares of EMC (EMC) are down 40 cents, or 2%, at $18.47, after the company this morning said it will spend $1.2 billion in cash to buy six-year-old Bethesda, Maryland-based startup Virtustream, which runs cloud computing services for enterprises. EMC will host a conference call with analysts to discuss the deal at 11:30 am, Eastern time, this morning, and you can catch a webcast of it on the company’s investor relations Web site.

EMC said Virtustream’s focus on managing big applications for companies such as SAP (SAP) programs, will extend the work that EMC already does with so-called “private cloud,” where it simply sells infrastructure to companies for them to reorganize how they run those apps in their facilities. EMC has been helping its corporate customers move applications to and otherwise get the benefits of cloud computing, using products developed by the company and software maker VMware Inc. Rich Kugele of Needham & Co., who has a Buy rating on EMC shares, and a $31 price target, writes that this is good for EMC and negative for Rackspace Hosting (RAX): We know Virtustream very well and think it is one of the most impressive IaaS companies in the space, with real IP and an operating system so good that it is licensed to other players to run their own clouds.

EMC is also, of course, the parent company of VMware, the virtualization powerhouse that many would argue kick started the move to the cloud originally. EMC needed Virtustream because VMware’s vCloud Air offerings aren’t yet able to fill the same need for large companies’ critical applications, Stephen Elliot, an analyst at IDC, said by e-mail. “Many Fortune 1000 organizations are looking to move these workloads, provided the financial model makes sense and that the sense of control, security and compliance are risk mitigated,” Elliot wrote. “While VMware would like to be here, they are not.” Closely held Virtustream was founded in 2009 by Rogers and Kevin Reid, the company’s president and chief technology officer. EMC’s cloud expansion comes as the company contends with weak demand for its most expensive storage equipment by focusing on new products and markets like flash-memory based machines. We think the roughly 12x EV/Sales this deal implies is irrelevant for that company given Virtustream’s software IP and our belief that RAX’s $6B+ market cap (with no buyers previously) makes a premium from here extremely unlikely.

Next month, the Hopkinton, Massachusetts-based company will make its ViPR software for controlling storage devices free through an open-source license. EMC has previously acquired CloudScaling, another cloud software vendor that had previously seen moderate success in building OpenStack-based clouds for large service providers.

In our mind, RAX not only loses one more potential acquirer, but now has a formerly small private competitor with the full power of EMC’s balance sheet behind it. In terms of the vision for the Virtustream deal, EMC will bundle Virtustream in with its “Federation Enterprise Hybrid Cloud Solution,” a suite of cloud-focused tools that also includes VMware vCloud Air. The danger here is that bringing a smaller company inside the huge corporate infrastructure can suck out its innovation, and all of the reasons it bought the company get lost in the corporate bureaucracy.

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