VMware Inc. has been snapping up cloud-focused startups while making deals with former enemies like Amazon.com Inc. and Alphabet Inc. for months, but changes at the software company hit a new level on Thursday.
VMware VMW, +0.04% announced planned acquisitions of two public companies — corporate sibling Pivotal Software Inc. PVTL, +0.22% and security-software company Carbon Black Inc. CBLK, +7.69% — with a combined enterprise value of nearly $5 billion. The moves signal that VMware is serious about focusing on offering a larger suite of cloud software to customers while playing nice with cloud-computing providers like Amazon AMZN, -0.98% and Alphabet’s GOOGL, -0.01% GOOG, -0.14% Google.
“The acquisitions announced today will advance our goal of offering more comprehensive and trusted cloud-agnostic solutions,” VMware Chief Executive Pat Gelsinger said in a conference call Thursday afternoon. “Pivotal strengthens our ability to help our customers build modern apps with velocity and efficiency and Carbon Black strengthens our ability to protect enterprise applications and workloads with an intrinsic security platform.
“With both companies we will be the only vendor able to deliver software solutions that enable customers to build, run, manage, connect and protect any app on any cloud and any device,” he added.
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The Pivotal deal would combine two companies that were already closely tied. Pivotal was formed as a spin-out from VMware and former corporate parent EMC, which was acquired by Dell Technologies Inc. DELL, +0.12% The deal involves VMware trading its shares to Dell — which will increase its ownership stake in VMware by 0.34% to more than 81% once the deal is complete — in exchange for Pivotal shares, and buying out other owners of Pivotal stock for $15 a share, which VMware said results in a blended per-share price of $11.71 and an enterprise value of $2.7 billion.
Pivotal focuses on developer tools for cloud-based software — as MarketWatch wrote when it went public, Pivotal is cloud software that helps make more cloud software. The $15 price for shares is exactly what Pivotal charged in its April 2018 initial public offering, but shares had recently been trading well lower than that level after a disappointing earnings report last quarter caused a catastrophic blow to the company’s share price that only reversed once VMware and Dell signalled a coming transaction last week.
Carbon Black went public less than a month after Pivotal, and is similar in that it offers cloud software that focuses on securing other companies’ usage of cloud software. Carbon Black sold IPO shares at $19 apiece, but had been trading lower than that level for months before a strong earnings report in May sent shares higher. VMware agreed to pay $26 a share for the company, which saw its stock jump 7.7% to $24.50 in the regular session Thursday before the announcement, then another 6.2% in after-hours action.
Those two acquisitions add to two cloud-based startups that VMware agreed to buy during the second quarter, as the company continued to build relationships with cloud-computing partners that were once considered mortal enemies. In an interview with MarketWatch last month, Gelsinger said that mergers and business partnerships have been, and will continue to be, major drivers for VMware’s business strategy and growth story.
VMware — which is hosting its annual VMworld conference next week in San Francisco — expects both deals to close in the second half of the year. Chief Financial Officer Zane Rowe said in Thursday’s conference call that VMware would commit $2.8 billion in net cash to the two acquisitions, using cash on the balance sheet and short-term debt.
“We expect Pivotal and Carbon Black together will add more than two points of revenue growth and over $1 billion in mostly hybrid cloud subscription and [Software-as-a-Service] revenue to VMware’s total revenue in year one and meaningfully increase our total revenue and hybrid cloud subscription and SaaS to over $3 billion in year two,” Rowe said in Thursday’s conference call. “We expect the combination of Pivotal and Carbon Black together to be operating income positive in year one and both cash-flow-positive and EPS accretive in year two.”
VMware stock declined more than 3% in after-hours trading following the announcements, which came in concert with fiscal second-quarter earnings. VMware shares have gained 8% so far this year, lower than the S&P 500 index’s SPX, -0.05% gain of 16.7% in the same period.
For the second quarter, VMware announced net income of $4.93 billion, or $11.93 a share, largely due to a tax benefit of $4.9 billion that resulted from an internal transfer of intellectual property. Revenue for the quarter was $2.44 billion, up from $2.17 billion in the year-ago quarter.
After adjusting for the tax benefit as well as costs such as stock-based compensation, VMware reported earnings of $1.60 a share, up from $1.54 a share in the same quarter a year ago. Analysts on average expected VMware to report adjusted earnings of $1.55 a share on sales of $2.43 billion, according to FactSet.