VMware: plenty of life after EMC

Quoting from Business Week:

EMC Corp. has done about a dozen acquisitions since 2000 in a bid to reinvent itself as more than just a data storage hardware maker. But eyebrows were still raised when it announced a $635 million cash deal for privately held VMware back in December, 2003.

It wasn’t so much the price tag — recent deals for Legato Systems and Documentum were over $1 billion each. But VMware, which makes software that allows companies to move computing tasks among servers, making the most out of their information-technology investments, was a relative unknown outside techdom. And it wasn’t exactly an intuitive fit with EMC’s (EMC ) storage business.

In hindsight, it may have been one of the smartest deals it made. In VMware’s first full year as part of EMC, the unit racked up the most license revenues of any recent acquisitions, according to VMware. And it’s growing like a weed, doubling revenues year-over-year, generating $80 million in sales in the first quarter of 2005 alone.

The success is arguably due to EMC not messing with a good thing. EMC kept the division as an independent subsidiary, still headquartered in Palo Alto, Calif. It’s still run by Diane Greene, who founded the company in 1998 along with her husband, Mendel Rosenblum, a Stanford University professor, and several of his graduate school students.

BusinessWeek Online reporter Sarah Lacy caught up with Greene recently to talk about the early days of VMware, why she decided to sell, and why things have gone so well since.
Edited excerpts of the conversation follow:

Q: What was the original idea behind the company?
A: We founded VMware at the beginning of 1998. There were five of us, and I was the only one on the management business side, but I came from a technical background too. There was an understanding that there were some fundamental problems with systems isolation, system compatibility, and they were trying to figure out how to solve these problems. The insight we had was to revisit the notion of virtual machines. If we could bring virtual-machine technology to the 1990s and run it on the server, that would be very high value.

We announced beta [of our first product] in early 1999, and in a couple months had 75,000 people download it. Then we started working on the server product. We brought out server product a couple years later. We introduced a way to partition up a big machine so you could run applications without running into problems. We announced our first partnership with IBM (IBM ) in 2001 and partnered with HP (HPQ ) and Dell (DELL ) also to bring that product out.

Q: What was your financial situation like by then?
A: We were pretty much cash-neutral. We put a desktop version up on our Web site for sale — we didn’t have a sales force. It was about $299, and it basically left us cash-neutral. We did take [venture-capital] money, but we actually never used it.

Q: So if things were going so well on your own, why did you sell to EMC?
A: We had been profitable for a couple of years, and we were getting ready to go public, when all the sudden there was a tremendous amount of interest in acquiring us. It was just a matter of looking at what made the most sense for everyone at the company. You take a certain amount of risk off the table for everyone in an acquisition and you avoid all the Sarbanes-Oxley and whatnot of an IPO. We just didn’t want our momentum to be broken for a second.

And it worked out. It has been a remarkably successful acquisition. We announced it Dec. 15, and we closed it Jan. 9. Then that year we were able to more than double our revenues and double our headcount. It shows it was actually a very good decision. It’s like we didn’t skip a beat.

Q: Since your software runs on any hardware, and you rely on partnerships like IBM, HP, and Dell, was it a concern when you were bought by a hardware company?
A: It would have been almost untenable had they been a server company — a huge value is that it runs on every kind of hardware. And it would have been untenable to be bought by an operating system company, so those two kinds of acquisitions didn’t make any sense.

Q: Did they try anyway?
A: Well one that’s publicly known is Microsoft (MSFT ), but the rest is all under NDA [nondisclosure agreements].

Q: Has any of your success come as a result of being part of EMC or was it all stuff VMware would have been able to accomplish otherwise?
A: Well you can never say, but I think it’s possible we were able to expand our international sales force more rapidly, even though it’s completely independent from EMC.

Q: It seems obvious what EMC got out of it. What has VMware gotten out of the deal?
A: We’re able to go full-bore and to be very bold in a way you can’t [as a stand-alone public company], with shareholders monitoring you on a quarterly basis. The good news is we’re thriving, we’re growing, bringing out great products. It’s a great thing that’s going on here, so I don’t tend to microanalyze and ask, “What did we get out this?” It doesn’t matter.

Q: Were you worried when you first started talking about being acquired? How did you negotiate to remain autonomous?
A: Well I actually came to the conclusion that all bets were off. [Being acquired] wasn’t my first choice, but I actually decided to do it because so many other people thought it was the right thing to do. Once we decided to do it, I said, “Who knows? They’re going to pay a lot of money for us. They’ll do what they want.”

But then as we started getting ready to implement and announce the acquisition, and we all rolled up our sleeves and started rationally saying, “What has to happen for this to keep working?” It made sense to stay separate. EMC was wonderfully behind us. [EMC CEO] Joe Tucci saw the strategic reasons for doing what we did. IBM and HP are very important partners to us, so we didn’t see any reason to integrate and we saw all kinds of reasons to act as an independent subsidiary. But I never negotiated it.

There’s an immense pressure from the financial community to say, “Where are the synergies?” But we just sort of tuned that out and said, “We’re going to do what makes sense.” Now everyone endorses it because it turned out well