VMware Inc. (VMW), the biggest maker of software that enables computers to handle multiple operating systems, said its partnership with Cisco Systems Inc. (CSCO) will change after its $1.26 billion acquisition of Nicira Inc.
Nicira makes software that helps networks run more efficiently, an area where Cisco is dominant with hardware sales. The industry is watching to see how the move to software- based networking will impact Cisco, said VMware Chief Executive Officer Pat Gelsinger in an interview this week.
Cisco, the largest maker of computer-networking gear, is poised to face further competition and profit margin pressure from technologies developed by Nicira, Arista Networks Inc., Big Switch Networks Inc. and Cyan Inc. By helping businesses run their networks more efficiently, such software reduces the need for the devices that make up most of Cisco's revenue.
"Does it change our relationship with Cisco? Well, certainly, but we are reviewing this as a positive opportunity to create more partnerships with them," Gelsinger, who became CEO of Palo Alto, California-based VMware in September, said in Barcelona, Spain.
VMware plans to accelerate growth by expanding in software for managing computer networks and storage devices, stepping up competition with San Jose, California-based Cisco. Software such as Nicira's is designed to give technicians a faster and more efficient way to manage network changes and monitor them from one place.
VMware is majority owned by EMC Corp. (EMC), which has a joint venture called VCE Co. with investment from VMware and Intel Corp. (INTC) to sell software and equipment to large businesses.
Nicira is "tiny" in terms of revenue and the virtual networking space is only "a few million dollars of revenue," Gelsinger said. There has been "an explosion in interest" in the area after the acquisition, according to the executive. "Obviously we hit a nerve," he said, adding the company could cause a "very large potential disruption."
"Of course, everybody looks at it as, 'Okay, how does it affect Cisco?'," Gelsinger said, adding that the company would continue to develop virtual networking technology with Cisco. "Cisco is a 70 percent share player so there's particular interest."
Gelsinger said he would also use VMware's roughly $4 billion of cash to pursue acquisitions that could help it to develop what it calls the software-defined data center, including security, networking, storage, availability or automation, he said.
"I have plenty of money, that's not the limitation," Gelsinger said, adding that it was about finding companies that fit VMware's strategy. "We've proved it with Nicira, we'll pay what it takes to get the right deal done."
Along with companies such as Intel and Hewlett-Packard Co. (HPQ), Gelsinger said the next few months will be difficult in the technology space as companies seek ways to conserve cash.
"We certainly see that there's a tough market," he said. "Overall, business conditions are hard. Chief information officers are very careful with their budget. They're making decisions very late in the quarter and they're looking very, very hard at their investments and scrutinizing them harder than they have been in the past."