Late last year, TheDeal.com reported on the flurry of M&A and VC activity surrounding virtualization technologies, which effectively decouple software applications from the hardware on which they rest, promoting space savings and power savings and overall improved efficiency in the enterprise. As VMWare Inc. prepares to go public, there's reason to believe more M&A activity in virtualization lies ahead. An insightful report from the 451 Group outlines some probable scenarios.

While VMWare — acquired by EMC Corp. for $635 million in 2003 — remains the best-known virtualization company, its technologies are also quite expensive, which poses a problem as the core virtualization products face commoditization. "Competition has driven the price of basic virtualization to effectively zero," states the report, noting that this poses special problems for VMWare, which, as its IPO nears, faces more pressure than ever to grow revenue. The report recalls that VMWare has made smart acquisitions in the past, such as the 2006 purchase of startup Akimbi Systems, and points out a host of other small players specializing in various sectors of virtualization, such as security (Reflex Security Inc., for example) and backup disaster recovery (Marathon Technologies Corp., Mendocino Software, Scalent Systems Inc. and SteelEye Technology Inc.) that could help VMWare secure its leading market position.

The 451 Group also says that VMWare is probably not the only company shopping around. Other major tech companies including Hewlett-Packard Co., IBM Corp., Sun Microsystems Inc. and Symantec Corp. — all of which are working to expand their virtualization options — are also likely to take an interest in some of the smaller players. —Andrea Orr

See Dec. 2, 2006, story on TheDeal.com
See April 26 story on TheDeal.com
See the 451 Group report

Tags: VMware, virtualization, ipo, m&a, vc, venture+capital