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VMware Inc. (VMW - Snapshot Report) recently announced that it is set to acquire Virsto, which develops software that optimizes storage performance and utilization in virtual environments. However, financial terms of the deal were not disclosed.

Founded in 2007, Sunnyvale, CA-based Virsto had received approximately $24.0 million of funding from August Capital, Canaan Partners, InterWest Partners, Southern Cross Venture Partners and Correlation Ventures. The acquisition is expected to close by the end of first quarter of 2013.

Virsto software addresses the complexity that enterprises face in the virtual environment, particularly related to virtual desktop infrastructures (VDI), large software development and test centers and business-critical applications. Virsto’s software helps in streamlining the processes by improving storage performance at a much less cost compared to other software in the market.

According to VMware, Virsto reduces cost of storage per desktop by as much as 70%. The acquisition will expand VMware’s storage product portfolio, which includes vSphere and vSphere storage appliance. VMware also announced that its parent, EMC Corp. (EMC - Analyst Report), is planning to license Virsto technologies, which will expand its reach in storage architectures.

Currently, Virsto has partnerships with both Microsoft (MSFT - Analyst Report) and Citrix Systems (CTXS - Analyst Report), closest competitors of VMware. Although, VMware announced that post acquisition it will continue to support Virsto customers, the future of these partnerships is not clear. This is due to the fact that the primary strategy behind the Virsto acquisition is to fight off increasing competition from Microsoft’s Hyper-V software.

Acquisitions have played a pivotal part in driving VMware’s growth over the past few years. VMware has acquired approximately 18 companies over the last three years. 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, sluggish North American and European markets coupled with modest IT spending environment are the headwinds going forward. Moreover, the company’s continued investments in emerging markets, product innovations and acquisitions are expected to weigh on the margins in the near term.

Currently, VMware has a Zacks Rank #3 (Hold).

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