VMware’s Acquisition Strategy Post-Dell Is Multi-Cloud ‘Tuck-Ins’

‘We are building out this multi-cloud portfolio that we’ve talked about. We will continue to acquire companies that fit into this portfolio,’ says VMware CEO Raghu Raghuram tells CRN.

VMware CEO Raghu Raghuram is poised to make some acquisitions following its spin-off from Dell Technologies in November to accelerate the company’s goal of becoming the world’s multi-cloud software kingpin.

“Where we are today in our evolution is we are building out this multi-cloud portfolio that we’ve talked about. We will continue to acquire companies that fit into this portfolio,” said Raghuram in an interview with CRN. “So that’s where I expect the bulk of our [M&A] activity to come from. I expect continued activity with respect to small, tiny tuck-ins of companies as we see fit.”

Historically, VMware has made fairly small acquisitions, said the CEO who’s been with the company for over 18 years. However, more recently as part of Dell Technologies, VMware has made some “big” multi-billion acquisitions such as Carbon Black and Pivotal Software.

With VMware soon becoming an independent company for the first time since 2004, Raghuram said he expects the “frequency” of smaller acquisitions around the company’s multi-cloud strategy to pick up because VMware’s capital structure will become more flexible.

[Related: Michael Dell On VMware Spin-Off, Supply Shortages And Channel Commitment]

“So now there is a broader shareholder base and it also gives us flexibility to use equity, along with cash to do M&A,” said Raghu. “So the financial considerations that go into capital structure, whether it’s the combination of debt, equity, etc. — the spin-off gives us a lot more flexibility from that point of view.”

Zeus Kerravala, founder and principal analyst of ZK Research, said Raghuram’s M&A strategy post-Dell Technologies around multi-cloud tuck-ins is a good move.

“Big acquisitions are tough and can slow down a company as the integration is being done. In general, VMware is a machine with a massive channel and skills in all of the areas it plays in. So it doesn’t need to make a big acquisition,” said Kerravala. “VMware can buy small technologies, tuck them into their company, and use the rest of the machine to gain market leadership.”

For example, he said VMware’s acquisition of software-defined networking standout VeloCloud in late 2018 was a great move which VMware could replicate post-Dell. “VeloCloud is a great example of an acquisition where VMware needed the network product, skills and channel, so that was worth the spend,” Kerravala said.

Overall, Kerravala said VMware is at an interesting crossroads.

“The company has dominated computing as the primary unit of compute was the hypervisor. Raghu quickly pointed out in an analyst call that the next big wave in computing will be containers and microservices, creating an opportunity for Tanzu,” said Kerravala. “It will be interesting to see if VMware is willing to disrupt its hypervisor business and really push the Tanzu story.”

VMware’s sole acquisition this year was its purchase of cloud-based application security startup Mesh7 in a move to boost its Tanzu and micro-services capabilities.

“The integration of Mesh7’s contextual API behavior security solution with Tanzu Service Mesh will enable VMware to deliver high fidelity understanding of which applications components are talking to which using APIs,” said Tom Gillis, senior vice president and general manager of VMware’s Networking and Security business, earlier this year when VMware unveiled its purchase of Mesh7 in March.

Dell is scheduled to spin off its 81 percent stake in VMware to Dell Technologies shareholders in November 2021, the biggest of which is Dell’s founder and CEO Michael Dell.

Michael Dell is set to own approximately 42 percent of VMware following the spin-off while also remaining Chairman of the Board at Palo Alto, Calif.-based VMware.

Dell’s goal with the spin-off is to simplify its capital structures, help Dell achieve investment-grade credit rating and provide the Round Rock, Texas-based company with funding to reduce its core debt stemming from its $67 billion acquisition of EMC in 2016. VMware will pay a special cash dividend of between $11.5 billion to $12 billion to the company’s shareholders, which will include around $9.5 billion for Dell Technologies.

“If you think about multi-cloud, what we really are saying is that we want to be the Switzerland of the industry. So if you want to be the Switzerland of the industry, then you want to be a standalone independent company, and that’s where we are headed,” said Raghuram. “It will allow partners that previously were competitors of Dell to now look at VMware with new life and say, ‘Hey, we can do strategic things with VMware.’ But at the same time, we have a fantastic relationship with Dell who we do tremendous amount of business with. We have certified that into a commercial framework agreement and a technology agreement that allows for continued deepening technology and business collaboration with Dell. So we think it will be in a best of both worlds situation. From a capital structure point of view, the capital structure will obviously be simpler and will allow us to have more flexibility.”