VMware is poised to buy out Pivotal in a move that looks sensible on paper, but could present certain challenges and tough decisions for the combined company.
Dell Technologies already owns majority stakes in both vendors, which makes the potential deal more of family reunion than a traditional acquisition. VMware spun off Pivotal, which develops a platform as a service (PaaS) based on the open source Cloud Foundry project, in 2013.
Under the proposed agreement, VMware would acquire all outstanding shares of Pivotal for $15. That arrangement would place the total price tag at about $1.45 billion, an 80% premium over Pivotal's Aug. 14 closing price of $8.30.
In a statement, Pivotal cautioned that nothing has been finalized and there is no guarantee an agreement will be reached. It also said no further comment would be provided until that happens.
Pivotal's apparent exit strategy is unsurprising in light of its recent financial results. In June, Pivotal's stock plummeted after it failed to meet revenue expectations for its first fiscal quarter of 2020, and cut its outlook for the full year. At the time, CEO Rob Mee blamed "sales execution and a complex technology landscape" for Pivotal's woes.
The day after news of VMware's potential acquisition, Pivotal's stock rose nearly 70% to about $14.
VMware-Pivotal combo presents mix of challenges, benefits
While the combined VMware-Pivotal would have significant upside, particularly for VMware, there are sticking points too, according to analysts.
"VMware typically gets shut down when going outside of IT infrastructure executives," said Keith Townsend, co-founder of consulting firm The CTO Advisor in the Chicago area, and a former solutions architect at VMware. "Owning Pivotal gives it street cred to have conversations that include application teams. They can sell their entire vision, which means bigger deals."
VMware's primary platform to push application development is its Kubernetes distribution, Pivotal Container Service (PKS), which was created in partnership with Pivotal. "However, Pivotal is all about Cloud Foundry," Townsend said.
Keith TownsendCofounder, CTO Advisor
"VMware needs to determine if they want to focus on [Pivotal Cloud Foundry] or PKS," he added. "I don't think they can push both."
That was a challenge for Pivotal, and it will remain one under VMware ownership, according to Townsend. "All of Pivotal's client-side developers code using [Pivotal Cloud Foundry]. It's not a trivial change to have them switch over to PKS."
The potential acquisition is an overdue move given Pivotal's struggles, said Holger Mueller, an analyst with Constellation Research in Cupertino, Calif. VMware will gain from diversification in its portfolio, he added.
In addition, a deal would be good for customers with regard to industry support for Cloud Foundry, he added. Questions about the PaaS' momentum arose in April, when the Cloud Foundry Summit event in Philadelphia had moribund attendance compared to previous years.
Still, some Cloud Foundry and Kubernetes users have figured out ways the two platforms can co-exist and play complementary roles.
In turn, VMware and Pivotal could make sense together from a revenue generation standpoint.
Pivotal is a very services-heavy company, said Gary Chen, an analyst with IDC. "You could make the case they're more of a services company than a software company."
PCF implementations go well beyond installing software, as the company helps enterprises transform the way they do application development through training, Chen said.
Finally, if Pivotal needs to make a major strategic shift, it will be easier to do so as a business unit within VMware, rather than a standalone public company in the glare of the market, when every quarter's results are scrutinized, Chen added.