Cisco Systems has agreed to pay $150 million for a 1.6% stake in EMC virtualisation software unit, VMware, and expects to take a seat on the board of the fast growing company. The deal values VMware at $9.4 billion just weeks ahead of its formal initial public offering (IPO) when EMC plans to float 10% of the company.

Cisco’s move closely mirrors an earlier agreement between EMC and Intel which enabled the chip vendor’s venture investment arm to take a 2.5% of VMware ahead of the proposed IPO. However, whereas Intel paid $218.5 million, equivalent to $23 per share, Cisco has agreed to meet the higher-end of VMware’s pre-IPO estimate of $25 per share.

The pre-IPO interest of two such prominent IT infrastructure providers highlights the dramatic impact VMware’s server virtualisation is having on the industry. Since the launch of VMware’s ESX server virtualisation four years ago, demand for server virtualisation products has exploded. IDC said sales of virtual server software reached $1 billion last year, and the Sanford Bernstein analyst Toni Sacconaghi recently estimated that VMware accounted for 85% of that business.

Earlier last week Cisco announced its own plan to jump on the virtualisation band wagon with its VFrame Data Centre strategy which the company’s chairman and CEO John Chambers dubbed Data Centre 3.0. It aims to position Cisco as a supplier of a network, and application-centric ‘fabric’ that will unify distributed estates of virtualised storage and server resources. 

Further reading

EMC to spin off VMware

Intel to take VMware stake