Experts say VMware is trying to get closer to developers with the $4.8 billion it's spending to acquire Pivotal and Carbon Black

Yuya Shino/Reuters

VMware CEO Gelsinger

• VMware announced Thursday that it plans to acquire developer software company Pivotal for $2.7 billion and cybersecurity company Carbon Black for $2.1 billion.
• Analysts say that VMware's acquisition of cloud software company Pivotal will help the company cater more to developers. That, in turn, will bolster Pivotal, which had hit a rough patch as a public company.
• As for Carbon Black, this will give VMware more cloud security capabilities, helping developers build software that can stand up to cyberattack.
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On Thursday, VMware announced it will acquire cloud software company Pivotal and cybersecurity company Carbon Black, in deals that analysts say could bring the cloud pioneer closer to the world of programmers.

VMware plans to buy Carbon Black for $2.1 billion and Pivotal for $2.7 billion. These deals are expected to close by the end of January 2020. Notably, the Pivotal acquisition keeps things all in the family - VMware and Pivotal are both subsidiaries of Dell Technologies, as an outcome of the Dell/EMC mega-merger.

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Craig Lowery, VP analyst at Gartner, says that VMware's acquisition of Pivotal specifically shows that VMware is seeking opportunities "to improve its credibility with developers." Similarly, we're told, the Carbon Black acquisition is intended to help developers bring more cloud security to their software.

That's important, he says, because developers are the ones that are increasingly making decisions for companies on what applications to buy.

"Developers are the ones who have more influence going forward in the future," Lowery told Business Insider. "They're going to cloud providers and buying services, like virtual machines as a service. Developers are the ones building those applications directly into the clouds. They are the ones requesting or helping decision makers decide where to spend that money."

In particular, Lowery says, Microsoft has taken a similar approach, and found lots of success. For example, Microsoft bought the code hosting site GitHub, introduced more Linux products, and expanded its open source focus - big moves that all cater to developers. Right now, VMware doesn't have as much of a developer focus, Lowery says.

"They need something like that to be more competitive," Lowery said.

'It makes sense to continue pulling VMware and Pivotal together'

VMware and Pivotal, already closely-related under the Dell umbrella, could be a good match.

Pivotal is a specialist in tools to help developers build software intended to run in the cloud, and actually collaborated with VMware on a service around the very popular Kubernetes open source project. For its part, VMware has made key acquisitions like Heptio as it works to expand its own Kubernetes appeal.

"It makes sense to continue pulling VMware and Pivotal together," Lowery said. "It's got a really good product set and it's popular with the developers that use it. It's a huge audience. It's a very specific and very enterprise audience."

In June, Pivotal reported earnings that disappointed Wall Street. Pivotal's stock tanked 41%, after what Wedbush Securities managing director Dan Ives called a "train wreck" quarter. Lowery says that the acquisition by VMware will likely be a better chance for Pivotal since it hasn't performed well lately in the stock market as an independent company.

Although Pivotal has specialities that large companies value, these are niche capabilities, rather than a mainstream solution, Lowery says. He adds that many of the public clouds like Amazon Web Services, Microsoft Azure, and Google Cloud offer their own, competing developer tools and platforms, taking away from Pivotal's market share.

Read more: Pivotal, part of the Dell empire, is making a big bet on the Google-created Kubernetes cloud software as it rights the course after a 'train wreck quarter'

"Given its challenge with the stock price and market and the opportunity to deliver something more meaningful among container technologies, that opportunity is probably a better one to pursue," Lowery said. "When Pivotal debuted on the market, it was expected to grow and have much more of a footprint in the enterprise. It has not happened."

When it first came to light earlier in August that VMware intended to acquire Pivotal, Ives wrote in a note that this would end "dark days" for Pivotal. Still, he expects that VMware shareholders will have mixed feelings about this, and he says this acquisition is not a "clear plug and play fit." On the market, Pivotal is currently valued at $3.73 billion.

"Strategically speaking, the Pivotal acquisition clearly opens up a key cloud developer opportunity for VMware which is a good fit and cross-sell area, while execution issues should be able to be smoothed out over the next few quarters this ultimately ends Pivotal's dark chapter as a public company," Ives wrote in a note Friday.

The Carbon Black acquisition

Jonathan Ho, partner at William Blair, also says VMware acquiring Carbon Black makes sense.

With Carbon Black, VMware says it intends to use it to bolster its cloud security capabilities, making it easier for developers to use the VMware platform to build software that can stand up to cyberattack.

Ho notes that the purchase price of $2.1 billion is seven times Carbon Black's revenue - and only a smidge above the $1.8 billion or so at which the company is currently valued at on the public markets.

"Carbon Black, which is a relatively small company today would be able to leverage the salesforce from VMware, which is a massive distribution for many customers today," Ho told Business Insider. "With VMware, they would bolster their security capabilities. They would integrate Carbon Black into offerings and give them more that they can upsell to their customers."

Ho says that there's been a lot of M&A activity in the cybersecurity space, and there's always the risk that these companies may get fully absorbed into their new corporate overlords and lost in the sauce. However, he says, VMware has the sales abilities to sustain Carbon Black's existing momentum and product strategy.

"While we would have liked to see Carbon Black realize its vision to deliver a competitive cloud platform as a public company, we believe the acquisition removes the risk inherent in the product transition that otherwise may have resulted in additional uncertainty," Ho wrote in a note.

In general, Lowery says that the tech industry is in a major mergers and acquisitions wave. He expects more companies to consolidate to get behind a cloud strategy.

"It's not unusual to see this kind of thing," Lowery said. "It's an expected behavior in this type of market. Cloud is driving the narrative. It's driving what people are doing."