Cisco to acquire equity stake in VMware

Cisco Systems Inc. plans to acquire a 1.6 per cent equity stake in virtualization software player VMware Inc., mirroring a step Intel Corp. took last month.

The investment is part of an upcoming initial public offering (IPO) of 10 per cent of VMware’s stock.

Cisco said last month it plans to buy US$150 million of VMware Class A common shares, which are owned at present by EMC Corp., VMware’s parent. The move is subject to regulatory and other closing conditions.

Once the investment is made, Cisco will own around 1.6 per cent of VMware’s total outstanding common stock. According to an updated VMware S-1 filing with the U.S. Securities and Exchange Commission, Cisco will buy six million shares, valuing each VMware share at $25.

VMware is considering whether it will appoint a Cisco executive to its board of directors.

Cisco hopes taking a stake in VMware will help bring two companies closer together and result in more users adopting VMware virtualization software and Cisco networking products. Cisco and VMware also announced they’ve agreed to collaborate on joint development and marketing.

Earlier last month Intel had announced that its venture capital arm, Intel Capital, would invest $218.5 million to purchase VMware’s Class A common stock at a price of $23 per share. The investment will give Intel 9.5 million VMware shares or around 2.5 per cent of the company’s total common stock. VMware intends to appoint a new member to its board from Intel.

EMC announced plans to spin off 10 per cent of VMware in February and plans to offer about 33 million shares priced at between $23 and $25 per share. The storage vendor expects the IPO to take place during its third fiscal quarter, which will end Sept. 30. After the IPO, EMC will continue to control VMware and own the bulk of the company’s stock. EMC hopes to raise as much as $740 million from the public offering.

EMC acquired VMware in January 2004 for $625 million and has run the company as a separate software subsidiary headed by Diane Greene, VMware’s former president and CEO.

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