EMC to Acquire Virtustream for $1.2 Billion -- 2nd Update

By Don Clark 

EMC Corp. agreed to buy privately held Virtustream Inc. for $1.2 billion in cash, the data-storage giant's latest response to pressures that include calls to break up the company.

One of EMC's biggest worries is a shift by companies to move some computing jobs to cloud services, which can reduce spending on storage and other equipment. Virtustream operates its own data centers to host such chores. It also sells data-center software that companies can use on their own premises, with a particular focus on managing applications sold by SAP SE.

Joe Tucci, EMC's chairman and chief executive, said Virtustream complements his company's storage equipment business as well as cloud services and software already offered by VMware Inc., EMC's majority-owned software affiliate. The offerings are based on what industry executives call a hybrid-cloud model, in which companies rely on external cloud services but continue to run some jobs on their own equipment.

"We are seeing a very, very strong preference for that model," Mr. Tucci said on a conference call.

EMC, based in Hopkinton, Mass., maintains an unusual federation of related companies that both collaborate and compete with one another. The best-known member is VMware, which pioneered a lucrative software category known as virtualization. EMC, which owns about 80% of VMware, boasts a market value of $52 billion. VMware's market capitalization stands at about $37 billion.

The federation structure has been under attack since last summer by Elliott Management Corp., which has pressured EMC to spin off its stake in VMware. But Mr. Tucci so far has resisted that idea, stressing the benefits of the federation and EMC's ability to expand its offerings through acquisitions.

Daniel Ives, an analyst at FBR Capital markets, said the Virtustream deal is the latest sign of EMC's determination to stick to that strategy.

"The Street will interpret this negatively, as we believe the path towards spinning-off VMware is the right move in our opinion towards enhancing shareholder value," Mr. Ives said. "It's an uphill climb for EMC from here on the growth front."

EMC's shares were recently trading at $26.26, off 2%.

Virtustream, founded in 2009, developed software designed to handle specific demands of SAP applications, which send a particularly heavy volume of data in and out of server systems. The German software company invested in the startup and helps resell its offerings.

Rodney Rogers, Virtustream's chief executive, said his company had considered a public offering and fielded acquisition offers from multiple parties. It opted for EMC for multiple reasons, he said, including its large network of sales partners and the chance to collaborate as part of EMC's federation.

Virtustream will serve as a new cloud-services segment of that federation under Mr. Rogers, who will report to Mr. Tucci, EMC said.

The transaction is expected to close in the third quarter and has been approved by both companies' boards. EMC said the deal wouldn't have a material impact on this year's financial results and is expected to add to revenue and per-share earnings in 2016.

Lisa Beilfuss contributed to this article.

Write to Don Clark at [e-mail]

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