VMware Set to Buy DynamicOps

A leading provider of virtualization and cloud infrastructure software solutions, VMware Inc. ( VMW - Snapshot Report ) recently entered into a definitive agreement to acquire DynamicOps Inc., for an undisclosed amount. The acquisition is expected to be completed by the end of the third quarter of 2012.

Burlington, Massachusetts-based DynamicOps develop solutions that help in running virtual workloads (hypervisor) across diverse cloud platforms. Hypervisor software (also known as virtual machine manager) allows several operating systems to share a single hardware host.

Solutions that can run multiple hypervisors have been in much demand lately and this is mainly due to the fact that these solutions help customers avoid cloud lock-in and price gouging. Customers prefer to use these solutions to save cost as well as maintain high availability.

The cloud management solutions from DynamicOps help customers to effectively provision and manage hypervisors on both VMware and non-VMware platforms as well as other heterogeneous environments. Hence, customers can now use Microsoft’s ( MSFT - Analyst Report ) Hyper-V, Xen-based hypervisors and Amazon’s ( AMZN - Analyst Report ) Elastic Compute Cloud (EC2) as easily as they manage their VMware cloud environments using vCloud director.

The Infrastructure–as-a-Service (IaaS) market is nearing saturation with higher number of players entering the market who are looking for ways to differentiate their offerings. In this regard, we believe that the DynamicOps acquisition fills up a significant gap in VMware’s product portfolio, by boosting its offerings for heterogeneous cloud platforms.

We believe that the acquisition will put VMware as one of the leading provider of cloud management solutions, thereby boosting top-line growth and profitability going forward.

Our Take

Acquisitions have been an integral part of VMware’s growth story over the years. VMware had been acquiring companies that can be easily integrated within its existing product portfolio, thereby expanding its reach into virtualization and cloud management. In 2011, the company acquired six companies for $304.2 million, net of cash.

In May 2012, the company acquired Wanova Inc., a cloud-based desktop virtualization solutions provider. We believe that VMware’s strong and innovative product pipeline along with its strategic acquisitions will enable the company to drive its top-line growth over the long term.

However, we believe that frequent acquisitions are a distraction for management, which could impact organic growth. Moreover, the company continues to face significant competition from open source providers such as Red Hat ( RHT - Snapshot Report ) over the long term. Thus, we have a Neutral recommendation on VMware over the long term.

We note that VMware shares have declined approximately 21.0% over the last 3 months as compared to a 3.4% decline in S&P 500, reflecting a sluggish European market and a relatively weak IT spending environment, which are expected to remain the primary headwinds in the near term. Currently, VMware has a Zacks #4 Rank, which implies a Sell rating over the short term.