VMware to get Intel as investor, board member

Chipmaker's venture capital arm will inject nearly $300 million into the company

Intel plans to buy a US$218.5 million (NZ$281 million) stake in VMware, which will bolster the companies’ existing arrangement under which VMware’s virtualisation software runs on Intel’s processors.

Intel has been selling chips since November 2005 with specialised technology that allows IT managers to use a VMware application that treats each hardware platform as multiple virtual platforms. The companies also cooperate on their marketing and product development strategies.

Intel will make the purchase through its investment arm, Intel Capital, subject to approval by US antitrust regulators.

The purchase will be part of an initial public offering (IPO), in which VMware plans to sell 10% of itself. VMware has not set a date for that sale, but it is expected to happen in the second half of this year. In addition to purchasing stock, Intel will also gain the power to appoint one of its executives to the VMware board of directors. However, Intel will still hold a minority stake in the company, with just 2.5% of VMware stock, according to an IPO registration form filed earlier this month by VMware with the US Securities and Exchange Commission.

The majority of VMware stock — 89% — will be held by EMC, which acquired VMware in 2004. That investment has paid off well, since VMware has grown quickly. VMware revenue rose 82% last year, to US$703.9 million, from US$387.1 million in 2005.

VMware says that high growth rate will continue, since currently just a small fraction of servers and business desktop and notebook PCs use virtualisation software. At the same time, many companies use only a portion of their computing power, because the latest multicore processors have allowed their processing power to grow faster than workloads.

To solve that problem, businesses can use virtualisation software to separate the operating system and application software from the underlying hardware. That allows them to combine multiple servers, storage and networking units into pools of capacity they can allocate wherever it is needed most, VMware says.

Coming so close to VMware’s IPO, Intel’s investment is likely to generate greater demand for the new stock, and for the virtualisation industry in general, one analyst says.

“Intel likes to know it has a more personal stake, instead of waiting for market forces to advance the application of virtualisation software,” says Richard Doherty, research director at The Envisioneering Group. “It’s not like that money was gathering dust on their shelf, but Intel’s venture arm tends to trigger others to invest in an industry sector too.”

The purchase also underlines a growing problem for software firms that have historically charged their licensing fees per processor, Doherty says. In this age of quad-core chips and virtualised server networks, that model could spell trouble for enterprise software providers, who could see their customers doing more work with fewer seats of software. By taking a stake in VMware, Intel is indicating that it sees virtualisation firms claiming some of that revenue.

Also last week, VMware launched Lab Manager 2.5, a new version of its lab automation software. IT departments use the application to efficiently manage their software development and testing labs, save money on IT management and deliver new software applications to market sooner, the company says.

In a separate announcement, Borland said it will integrate Lab Manager 2.5 with its Lifecycle Quality Management application, SilkCentral Test Manager 2007.

Together, those applications will allow software developers to test their applications across multiple configurations using virtual platforms.

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