EMC, VMware Raise Eyebrows With Cloud Spinoff
The proposed $67 billion merger of Dell Inc., storage giant EMC Corp. and its VMware Inc. subsidiary got more complicated this week when the future Dell units unexpectedly announced a cloud spinoff.
EMC (NYSE:EMC) and VMware (NYSE:VMW) followed up last week's announcement of a blockbuster merger with Dell by outlining plans to form a new cloud services business under EMC's Virtustream Inc. unit based on Bethesda, Md. Virtustream will be jointly owned by VMware and EMC and led by current Virtustream CEO Rodney Rogers, the companies said.
EMC and VMware said Virtustream's financial results would be consolidated into VMware's earnings statements beginning in the first quarter of 2016. Under terms of the Dell-EMC merger, the partners have said they would issue a VMware "tracking stock."
VMware stock plunged nearly 20 percent midweek when the Virtustream cloud spinoff was revealed, but has since recovered.
EMC CEO Joe Tucci said Wednesday (Oct. 21) during a conference call with investors that Dell was not involved in the decision to spinoff Virtustream. EMC acquired privately-held Virtustream in May for about $1.2 billion. The all-cash acquisition was portrayed at the time as “elevating” EMC’s current alliances with VMware on the virtualization side and SAP on the applications end.
"Through Virtustream, we are addressing the changes in buying patterns and IT cloud operation models that we are seeing in the market," Tucci said in a statement announcing the spinoff. "Our customers consistently tell us that they are focused on their IT transformations and journeys to the hybrid cloud. The EMC Federation is now positioned as a complete provider of hybrid cloud offerings."
Perhaps, but so far news of the surprise spinoff has riled VMware investors and left analysts scratching their heads as EMC introduces another layer of complexity to an already complicated merger with Dell.
In announcing the Virtustream acquisition in May, Tucci hinted at big plans for the managed cloud services vendor. Calling the Virtustream deal a "game changer," Tucci said, "EMC will be uniquely positioned as a single source for our customers’ entire hybrid cloud infrastructure and services needs."
In making the case for a Virtustream spinoff in the midst of a complex merger with Dell, Tucci said this week the new cloud services business would help align its cloud capabilities. Along with Virtustream and VMware, those assets include EMC's Information Infrastructure unit along with its VCE converged infrastructure subsidiary acquired from Cisco Systems last year.
Virtustream also gained provisional authority in June to supply cloud services to U.S. government agencies under the Federal Risk and Management Program, or FedRAMP.
On-premise and cloud offerings would include VMware's vCloud Air, VCE Cloud Managed Services, Virtustream's infrastructure-as-a-service (IaaS) and EMC's managed and object storage services offerings, Tucci stressed.
The cloud services spinoff would integrate those assets into a "unified" IaaS offering that would target a range of business workloads and deployment options, he asserted.
Given the negative investor reaction to the Virtustream spinoff, observers wonder if VMware's bottom line will eventually take another hit at a time when its vCloud Air hybrid cloud and software-as-a-service offering are struggling to gain traction in the enterprise cloud market.