Cisco Earmarks $150 Million To Invest In VMware

Cisco Systems plans to purchase $150 million in VMware stock in an investment that's expected to speed up the use of VMware's virtualization products with Cisco's networking infrastructure gear.

Announced Friday, the deal also calls for increased collaboration between VMware and Cisco "for enhanced data-center optimization and [to] extend the benefits of virtualization beyond the data center to remote offices and end-user desktops."

VMware, which is a unit of EMC, is preparing to launch an IPO. The announcement of the Cisco purchase comes two weeks after Intel said it would invest $218.5 million in VMware. The company's virtualization products have been mainly used to create virtual machines on servers to increase their utilization rates. But virtualization is increasingly being used with other IT infrastructure, including storage or networking, to boost usage rates and allow for consolidation of systems.

Intel's investment will buy it a 2.5% ownership share, and Cisco is getting a 1.6% share of the company, according to announcements from the involved companies. When VMware's stock begins trading after the IPO, there will be two classes of stock for the company.

VMware and operating-system virtualization have been on a roll in recent quarters; earlier this week EMC said VMware had increased its second-quarter sales by 89%. Market research studies have pegged VMware's virtualization market share at more than 80%. EMC will continue to control VMware after the Cisco and Intel investments and after the launch of the IPO.

Underwriters for the upcoming IPO include Citigroup Global Markets, JP Morgan Securities, and Lehman Brothers. The IPO plan calls for 10% of VMware to be spun off with an estimated price of $23 to $25 per share.

VMware and Cisco said they've agreed to expand their collaborative efforts on joint development, marketing, and customer and industry initiatives. VMware said it would consider appointing a Cisco executive to VMware's board of directors at a later date.