EMC And VMware Spin Out Virtustream As Jointly Owned Company

In a surprise move today at its earnings call, VMware announced that together with EMC, it was forming a jointly-owned company under the name of Virtustream, which is the company EMC bought last spring for $1.2 billion.

The move comes against the dramatic backdrop of the announcement last week that Dell was acquiring EMC for $67 billion. You see, EMC owns 80 percent of VMware. To complicate matters, VMware is traded as a separate company, and the newly formed Virtustream will be owned 50/50 by both companies. It gets even trickier because Virtustream’s financial results are going to be consolidated into VMware financial statements beginning in Q1 2016.

Got that? To sum up: Dell is buying EMC. EMC owns most of VMware. VMware is a separately traded company. VMware and EMC own Virtustream together, but Virtustream’s financials will become part of VMware.

Now that we’ve got the financial details sorted out, why are they doing this now? If you look at the root of the Dell deal, it comes down to this: the companies recognize the potential of the hybrid cloud market. For those of you who aren’t up on the lingo, the hybrid cloud is when companies have a combination of on-premises and cloud infrastructure and software.

In practice that might mean they get some cloud services from AWS, but they could still be running Dell servers and EMC storage inside their datacenters (or any combination of vendors).

Today, most large companies are operating this way. Only companies born in the last five years are likely to be all in, in the cloud at this point, and even some of them might have a few on-premises services.

To The Future

EMC and VMware at their core represent the old guard. They are solidly on-premises datacenter companies, but like all companies they see where the industry is moving. They see the growing power of AWS and all of the services it offers, and the two companies are looking for a way to stay relevant in this changing market.

The hybrid cloud seems to be the perfect strategy for them because it gives them a chance to play in the datacenter where they are most comfortable, yet continue to make that shift to the cloud where they both know they have to go.

Dell, which has to have a say in this at this point, has to be on-board with this approach, and when (if) the deal closes, this should play into Dell’s own strategy to become a significant player in the hybrid cloud market.

Keep in mind, however, that they aren’t the only traditional player out there trying this approach. IBM, in spite of its poor earnings yesterday (maybe because of them), has a strategy firmly focused on helping those large companies who are struggling to move to the cloud. The hybrid strategy plays to its consulting strengths, as well as its full-court cloud approach around SoftLayer for infrastructure, Bluemix for developers and a portfolio of over a hundred SaaS services.

IBM bought many of these pieces, and so far, the strategy has been slow to bear fruit in spite of highly publicized deals with Apple, Twitter and others.

HP, Cisco, Oracle; they are all trying a similar approach — and while all see growth in the cloud, they also are struggling to see the kind of profits they have been used to making in the past.

Challenges Ahead

It’s the same kind of challenge that Dell-EMC is likely to face moving forward. Large companies tend to move slowly,  and perhaps the thinking is that a smaller spin-off will provide some of the agility the whole will most definitely be lacking.

Further confusing matters, is exactly what Dell will do with VMware. Having financed this acquisition to the tune of $40 billion, chances are it’s going to look to dump some things, and as I’ve written, selling off chunks of VMware stock would be a good way to make some of that investment back in a hurry.

Regardless, this announcement takes what had been a thorny deal to begin with and makes it even more complicated. I suppose it will be up to the lawyers and accountants to sort this all out.

For now Virtustream is a newly formed joint venture that gives both companies a legitimate cloud property they can point customers to as they try to make the transition to the cloud future. Should the deal with Dell go through, well it gives Dell the same thing.