Intel Capital to buy $218.5 million share of VMware

Intel Monday said it plans to buy a $218.5 million stake in the software firm VMware, bolstering the companies' existing agreement to run VMware's virtualization software on Intel's processors.

Intel has been selling chips since November 2005 with specialized technology that allows enterprise 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.

The chip giant will make the purchase through its investment arm, Intel Capital, subject to approval by U.S. antitrust regulators.

The purchase will be part of an initial public offering (IPO), in which VMware plans to sell 10% of the company. VMware has not set a date for that sale, but it is expected to happen in the second half of 2007. 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 Monday by VMware with the U.S. Securities and Exchange Commission.

The majority of VMware stock -- 89% -- will be held by EMC, the enterprise data storage company that acquired VMware in January 2004. That investment has paid off well, since VMware has grown quickly. VMware revenue rose 82% last year, from $387.1 million in 2005 to $703.9 million in 2006.

VMware says that growth rate will continue, since currently just a small fraction of existing servers and business desktop and notebook PCs use virtualization 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 virtualization 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 said in the SEC form.

Coming so close to VMware's stock offering, Intel's investment is likely to generate greater demand for the new stock, and for the virtualization industry in general, one analyst said.

"Intel likes to know it has a more personal stake, instead of waiting for market forces to advance the application of virtualization software," said 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 said. In this age of quad-core chips and virtualized 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 virtualization firms claiming some of that revenue.

The IDG News Service is a Network World affiliate.