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VMware Acquires SpringSource to get Stickier

VMware took a big step today toward making its software less replaceable in corporate data centers. The company, which makes virtualization software that lets businesses run servers more efficiently, spent $420 million to buy SpringSource, a maker of programming tools for Java developers.

VMware, which is majority owned by EMC, has grabbed a large share of the market for software that lets IT departments condense more computing work onto servers running Intel-compatible chips. The approach has saved companies money on server hardware, power, and IT labor, and led VMware to a blockbuster 2007 IPO. But VMware is facing sharp competition from Microsoft, which has included virtualization functions in its Windows Server operating system.

Buying SpringSource could give VMware?? products a firmer foothold in corporate data centers. About half of new software development using the Java language, which is the basis for many business applications, is done using SpringSource?? tools, VMware Chief Executive Paul Maritz said during an Aug. 10 conference call. By buying SpringSource, VMware can more closely knit together those Java applications with its virtualization software, making data centers easier to operate and saving customers money, Maritz said. SpringSource, said to be growing quickly, also makes tools for writing Web applications, which could extend VMware?? reach.

If owning SpringSource makes VMware stickier, it could help alleviate a weakness of the company, which is that developers don?? create applications in a way that?? dependent on its products. That?? a weakness Microsoft is trying to exploit. At the company?? annual financial analysts meeting in Redmond, Wash. July 30, server and tools group president Bob Muglia said ??upplanting and replacing VMware is much more straightforward?than getting businesses to switch from other operating systems to Windows. Companies simply don’t have as much work invested in running applications in conjunction with VMware. Or, as Muglia put it, “It takes me 90 seconds to move a virtual machine.”

Buying SpringSource will come at a cost to VMware’s profit margins, which are already under pressure. VMware paid $362 million in cash and equity for SpringSource, and assumed another $58 million of SpringSource’s unvested stock and options. The deal will lower VMware’s profit margin through 2010, the company said.

Earlier today, Jeffries & Co. research analyst Katherine Egbert downgraded VMware’s stock to “underperform,” citing its expensive $32 share price relative to its future earnings and cash flow. “There’s no lever to lift margin” since the company is managing for revenue growth vs. profitability, she says.

Still, buying SpringSource could be the kind of deal VMware needs in order to execute on Maritz’s and Chief Operating Officer Tod Nielsen’s strategy of building an “ecosystem” of developers around VMware’s products. In order to grow, VMware has to “speak directly to operational expense,” said Maritz. That requires owning more of the software tools that customers use to build and run their applications.

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