EMC adds VCE to its stable, buys out Cisco's interest

EMC will now consolidate converged infrastructure player VCE under its federation and buy out most of Cisco's stake in the joint venture. Other than that financial arrangement, Cisco and EMC say it's business as usual for VCE.

EMC said Wednesday that VCE, a joint venture with Cisco and VMware, will be consolidated into its stable of companies. EMC will buy out most of Cisco's stake in VCE, but the networking giant will retain 10 percent of the equity.

Terms of the deal, expected to close in the fourth quarter, weren't disclosed. 

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In the big picture, EMC, which missed third quarter earnings estimates , has doubled down on its strategy of creating a federated stable of IT companies. VCE specializes in best of breed converged infrastructure for cloud computing. VCE got its start as a venture with Cisco and EMC and integrated those systems into what it calls Vblocks. VCE took systems from multiple vendors and gave IT buyers one support call. As a result, VCE drove sales for both Cisco and EMC gear.

With VCE in the fold, EMC will now consist of four units:

  • VCE;
  • EMC;
  • Pivotal, focused on big data;
  • And VMware.

Critics have suggested that EMC should break up those parts into individual companies. EMC just thumbed its nose at them.

On a conference call with analysts, EMC CEO Joe Tucci said the company's controlling interest in VCE will allow it to expand the converged infrastructure options for cusotmers. EMC will absorb 2,000 employees at VCE. 

David Goulden, CEO of EMC Information Infrastructure, added that bringing in VCE will allow the company to "fully benefit from the clear leader in the converged infrastructure market segment" and boost earnings into 2015. 

As for VCE customers, there won't be any significant changes. VCE will continue to be run by CEO Praveen Akkiraju with the same org chart. Cisco, EMC and VCE have also renewed engineering, reseller and support agreements. Chalk VCE up as an interesting example of competition. EMC's federation and Cisco are increasingly competing. VMware has pushed into software defined-networking. Cisco has dabbled with storage and partnered heavily with EMC rival NetApp. And VCE's systems could be seen as alternatives to Cisco's own UCS converged infrastructure. Add it up and it makes sense for Cisco to partner and have a stake in VCE, but also cash in now. 

Akkiraju said:

As we head into the next phase as a company, it’s important to understand the context behind VCE’s evolution. We were created to disrupt the traditional siloed infrastructure market, and without a doubt our initial joint venture structure was a great fit for this mission. However, now that VCE is a $2 billion company looking to expand beyond platforms to deliver hybrid cloud solutions, it’s critical to evolve to a structure that supports our broader mission from the technology and financial perspectives.

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According to Cisco and EMC, VCE will be able to grow and innovate better under one of its owners. According to EMC, VCE has a $2 billion-a-year "demand run rate." That run rate is different from revenue. A footnote defined demand run rate as "an annualized calculation of orders received in the applicable period by VCE, VMware, EMC and Cisco for the sale of VCE Vblock and Vblock-related products and related services."

Also:  VCE launches new converged all-flash system  |  Cisco steps on UCS server gas, launches 'disaggregated' system  |  Cisco launches ACI, a software analog to UCS in data centers  |  EMC revamps lineup with new storage arrays, systems

EMC said VCE's recapitalization won't impact earnings for 2014.

In a blog post, VCE chairmen Howard Elias, President and COO, EMC Global Enterprise Services, and Gary Moore, President and COO, Cisco, called the joint venture the most successful in IT history. I'd argue Verizon Wireless wasn't exactly chump change, but VCE was a hit. Elias and Moore said:

The best time to change and transform is when you’re at the top of your game. The industry continues to move fast and evolve, and we want VCE to continue to grow and succeed in this environment. It’s time for VCE to broaden its horizon and help customers in their journey to the Hybrid Cloud. This has been our focus and we will accelerate our support to our customers. We also want to signal to our customers that VCE is going to be around for the long haul. And Cisco’s commitment to VCE continues in the form of a multi-year resale, support and engineering agreement. The partnership remains strong and VCE will be a vibrant channel for Cisco technologies going forward. In essence, we started with a JV structure that has been wildly successful, so now it’s time to show commitment for the long term in a way that fits the business models of EMC and Cisco well.

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