Cisco + EMC or Cisco + VMWare?

Implications: Rumors abound that Cisco might purchase EMC, but that seems very unlikely given the cost involved and the lack of apparent synergy.  Cisco could, however, purchase VMWare.  Cisco has made virtualization a key strategic focus, and adding VMWare would instantly catapult them to the top of the virtualization rankings.

Analysis: As the referenced article states, the probability of Cisco buying EMC seems very low.  The market cap of EMC is currently in excess of $30B, which means the price tag for an acquisition would have to be above $40B.  Cisco has a lot of money, but not that much!  They could probably leverage such a deal and make it happen if the payoff was clear, but in this case the payoff is anything but clear.  EMC is focused on a market that is significantly divergent from Cisco’s strategic focus, so such an acquisition would make little sense for Cisco even if the price were low.  Given that Cisco would have to leverage the house to make the deal work, the probability of such a deal seems close to zero.

VMWare, however, is a very different picture.  VMWare’s current market cap is around $12-15B, so an acquisition could conceivably be done for no more than $18-20B.  It’s still a lot of money, but more within Cisco’s grasp.  It’s also a direction that fits well with Cisco’s market strategy.  Cisco has identified virtualization as one of the key focus areas for their further growth.  Their “VFrame” product line seems to be doing well in the market, but nonetheless Cisco is not a name that pops readily to mind when top virtualization vendors are being discussed. 

Cisco is above all a marketing machine, and nobody knows better than they the importance of mindshare.  They would likely be willing to make a major investment to gain more mindshare in a market they are targeting.  Buying VMWare would achieve that goal instantly, since despite VMWare’s recent troubles they are still the virtualization leader in technology, revenue and mindshare.  Their image may be slightly tarnished recently, but as yet the damage is minor.  Historically Cisco has intimate knowledge of VMWare, since they invested $150M in July of 2007 to buy a small percentage of the company, a percentage they still hold.

EMC still has virtually complete control over VMWare, so it would be up to them to decide whether Cisco could buy all or part of VMWare.  Despite VMWare’s recent drop (collapse?) in market cap there seems little reason to believe EMC has soured on their investment.  EMC doesn’t need the money and virtualization is still a key part of their future plans.  It’s very difficult to picture EMC selling their investment, or even a majority stake, to anyone at this point.

The most likely scenario seems to be Cisco increasing their stake in VMWare without actually purchasing a controlling interest.  Cisco could invest anywhere between $1B and $5B into VMWare without impacting their cash position.  This would give them increased control over VMWare’s future direction and ensure their shared vision would continue to flourish.  They might also consider it a good investment at this point, given VMWare’s recent drop in market cap.

It seems VERY unlikely Cisco will even consider buying EMC.  It also seems unlikely EMC will give up their controlling interest in VMWare.  It does seem reasonable that Cisco could increase their stake in VMWare, which would probably prop up VMWare’s market cap somewhat.  That alone would make the idea attractive to both Cisco and EMC.