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EMC's US$1.2 billion Virtustream deal furthers cloud strategy

[SEATTLE] EMC Corp agreed to buy Virtustream Inc for about US$1.2 billion, letting clients of the storage-systems maker run products from Oracle Corp, Microsoft Corp and SAP AG in the cloud.

When the deal closes, the Virtustream business will become EMC's managed-cloud services division. Virtustream Chief Executive Officer Rodney Rogers will report to EMC CEO Joe Tucci, the companies said in a statement Tuesday.

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. EMC owns a controlling stake in VMware.

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.

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"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," Mr 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. The Bethesda, Maryland-based company said its customers include Coca-Cola Co., Hess Corp. and Lexmark International Inc.

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.

Next month, the Hopkinton, Massachusetts-based company will make its ViPR software for controlling storage devices free through an open-source license. EMC's first-quarter earnings fell short of analysts' estimates, while the company's forecast missed Wall Street's projections. Revenue rose 2.4 per cent to US$5.6 billion.

The Virtustream purchase, slated to be completed in the third quarter, is expected to start adding to EMC's sales and profit next year.

"This broader hybrid cloud portfolio should enable EMC to expand its tentacles," Daniel Ives and James Moore, analysts at FBR & Co, said in a note to investors. "Ultimately, while we like this move in the cloud, we believe the company will need more M&A to help find its next growth act as EMC's core business remains very mature."

Activist shareholder Elliott Management Corp. has pressured EMC to spin off VMware. Tuesday's acquisition was further evidence that EMC doesn't plan to adopt that approach, Mr Ives said by e-mail.

EMC's shares fell 2.1 per cent to close at US$26.29, while the Nasdaq Composite Index dropped 1.1 per cent. The stock has declined 12 per cent this year amid investor questions about strategy and a succession plan for Tucci.