EMC Said to Absorb VCE Joint Venture as Cisco Reduces Stake

Updated on

EMC Corp. is buying out much of Cisco Systems Inc.’s stake in joint venture VCE, which sells high-end data center equipment, according to people with knowledge of the matter.

EMC will meld the joint venture into its business and consolidate VCE’s sales into its quarterly results, providing a boost to revenue, said one of the people, who asked not to be identified because the change wasn’t public. Cisco will remain an investor in the VCE business, but at a reduced stake, another person said.

EMC e-mailed media yesterday to announce a conference call that will take place today to discuss a “new business development,” without disclosing specifics. The Hopkinton, Massachusetts-based company is also set to report third-quarter earnings today.

Dave Farmer, a spokesman for EMC, declined to comment. John Earnhardt, a spokesman for Cisco, didn’t return a request for comment.

In 2010, Cisco joined with EMC, virtualization company VMware Inc. and chipmaker Intel Corp. to form VCE, which makes pre-configured systems that combines the companies’ technologies. Chief information officers can use VCE technology as building blocks for their data centers. VCE said in May that sales are on pace to reach $1.8 billion in 2014, up about 80 percent from the year before.

Cisco Losses

According to a Cisco filing with the U.S. Securities and Exchange Commission, the San Jose, California-based networking gear maker had invested $716 million in VCE as of July 26 and it owned 35 percent of the venture. Cisco had also lost $644 million on VCE since it was started in 2010, the filing said.

A person familiar with Cisco’s finances said the filing didn’t reflect how much VCE generated in revenue and profit for the parent companies. A person familiar with EMC’s finances said VCE is profitable, as are the various products it sells.

EMC is organized into what it calls a federated model, with Chief Executive Officer Joe Tucci overseeing several different entities that each have their own CEO, including the company’s information infrastructure business, VMware and the Pivotal joint venture between EMC and VMware. VCE will now become one piece of the federation, one of the people said.

EMC’s board has been considering strategic options, including a spinoff of VMware, of which it is the majority owner. EMC has also held talks about a merger with Hewlett-Packard Co., which stalled over disagreements on price, people familiar with the matter said last month.

Tense Relationship

The VCE change is set to decrease the entanglements between EMC and Cisco, two companies that have seen their relationship sour amid Cisco’s increasingly heated competition with VMware. In 2011, VMware, with EMC’s blessing, bought a software company called Nicira that has technology that lets customers make do with cheaper networking equipment. Last September, Cisco said it would acquire Whiptail, a storage startup that competes with EMC.

Executives from Cisco and VMware have also been ramping up a war of words at public events regarding each other’s plans for so-called software-defined networking, an approach pioneered by Nicira.

The tension isn’t lost on customers, some of whom have questioned the long-term viability of the VCE partnership.

“I know VCE is growing, but wondering about the health of that alliance,” Suzan Pickett, manager of systems engineering at Columbia Sportswear Co., said in an interview earlier this year.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE