VMware CEO Rejects Call To Reunify with Parent EMC

Would VMware and its parent EMC be better off as one company? A report last week by two Wells Fargo analysts suggesting the two should combine into one company was rejected by VMware CEO Pat Gelsinger. The analysts suggested the plans to offer federated solutions among the companies EMC controls, which, in addition to VMware, include RSA and the recently spun-out Pivotal, would make more business sense and offer more shareholder value.

At its annual EMC World conference earlier this month, the company launched what it calls EMC II, an effort to federate the four companies to offer software-defined datacenter solutions. Despite this new federated business model, EMC said it remains committed to letting customers choose best-of-breed solutions. Wells Fargo analysts Um and Jason Maynard issued a note suggesting that could be better accomplished by combining EMC and VMware into one company. EMC spun VMware off in 2007.

"What EMC and VMware call federated solutions is, to us, taking the next step in addressing a key trend in the market today of converged solutions," they wrote, as reported by Barron's Tiernan Ray. "Over the past few years, large OEMs such as IBM, HP, Oracle and Dell have built up or acquired a broader capability across the stack and are offering complete converged solutions rather than point products. Cooperation turned into coopetition and will likely become full-on competition -- to us, the friction is fairly evident and we expect this to continue to grow."

Pressed on the matter in an interview on CNBC's Fast Money program Tuesday during the grand opening of VMware's expanded campus in Palo Alto Calif., Gelsinger said there are no plans to combine the two organizations.

"Simple answer, no," Gelsinger said. "It is working so well. We have this federated model where each company has their own strategic role. We're independent, we're loosely coupled and we're executing like crazy. And it's working for shareholders, our ecosystems, our employees on this beautiful campus here. This has worked and we're going to stay on this model because it's been completely successful."

Speaking at the Sanford Bernstein conference yesterday, EMC chairman and CEO Joe Tucci reiterated the strategy. "In each of these companies the missions are aligned," Tucci said, according to the Seeking Alpha transcript of his remarks. "One depends on the other, built on the other. But, again, you can take these and you can use them as a card giving customers choice, which I think is going to help to find a winner in the third platform. We're not forcing you to use our technologies. You can use Pivotal without using VMware. You can use VMware without using EMC, but when they all work together you get a special layer of magic."

Even though they're separately traded companies, EMC holds an 80 percent stake in VMware and has 97 percent control of voting. Longtime storage industry analyst John Webster wrote the companies will have to deliver the so-called "third platform" it evangelizes more affordably for the EMC II federated strategy to be successful. "EMC will have to deliver on all three aspects of its redefined journey -- inclusion, value and affordability -- if its new Federated EMC strategy is to work as promised at EMC World," Webster noted.

For VMware, it's caught in a tough spot. Microsoft's Hyper-V is gaining ground on the dominant VMware virtualization platform and the Microsoft Azure public cloud also appears to have a strong head start over the VMware Hybrid cloud service A recent survey of Redmond magazine readers found that 21 percent who now use VMware as their primary virtualization platform plan to migrate to Hyper-V.

"I wouldn't want to be on EMC's board," one partner of both companies told me during a conversation at this month's Microsoft TechEd conference in Houston. The only way it appears VMware can stem the migrations to Hyper-V is by lowering its cost, experts say. "The problem is it's their 'Office,'" said one Microsoft exec during an informal discussion at TechEd.

It will be interesting to learn how VMware pushed forward in the next few months leading up to its VMworld  2014 conference in late August.

Posted by Jeffrey Schwartz on 05/30/2014 at 11:41 AM