Money might make the world go round, but the market for virtualization software can make your head spin.
Rule Breaker VMware's (NYSE:VMW) stock isn't making its investors happy; it’s dropped to the lower $20s after a short spike to more than $100 per share in late 2007. That devaluation makes the virtualization expert look like a prime takeover target to the untrained eye. Industry giants like Cisco (NASDAQ:CSCO) have been rumored to be casting bedroom eyes at VMware recently.
But that's not happening. For one, data management specialist EMC (NYSE:EMC) owns 85% of VMware and would hate to take a lowball offer for its star protege. "We have no intention of separating these two companies," said VMware CEO Joe Tucci at a recent investor conference. Cisco owns 2% of VMware, and will probably have to settle for that small stake. The acquisition-happy and cash-rich networking specialist can go spend its war chest on other good-looking upstarts.
Elsewhere in the wide world of virtualization, speculation has been building that Oracle (NASDAQ:ORCL) wants to get its hands on server virtualization purveyor Virtual Iron, and that Microsoft (NASDAQ:MSFT) is doing a complicated dance with little Citrix Systems (NASDAQ:CTXS). Citrix bought out open-source virtualization package Xen a few years back, and Mr. Softy maintains its own virtualization solutions. However, that's not stopping Citrix from hooking its virtual desktop software into Windows Server 2008. We're talking about rich and historically acquisition-hungry tech giants here, and they are throwing their considerable weight around in a pretty fresh virtualization sector.
Here's how I think things will shake out over the next couple of years:
- Microsoft could very well make a grab for Citrix, which carries a dainty $4.3 billion market cap and sells mostly desktop-oriented software that would complement Microsoft's own while braiding neatly into Redmond's prized Office suite and other applications.
- Oracle wants to play, and Virtual Iron makes lots of sense. Larry Ellison doesn't have a real foothold in this market yet, so any product will do. Furthermore, big-iron server systems and their virtual brethren tend to get along famously with Oracle's mainline database products.
- I don't think Cisco will reach for the virtualization market at all. This company knows networking inside and out, and will continue to tailor its switches and routers to support virtual machines. But that'll be an in-house thrust. Nobody else gets close to Cisco's technical prowess here, and I bet John Chambers can find plenty of opportunities to grow by acquisition in other areas without entering the virtualization hornets' nest.
So if you want to play the buyout angle, I'd suggest that you read up on Citrix. But at these prices, you really can't go wrong with the current and future niche market leader: VMware.
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