VMware software company said on Thursday that it is buying Carbon Black at a company value of $ 2.1 billion and Pivotal at a company value of $ 2.7 billion. The agreements are expected to close by the end of January 2020.
Pivotal's shares were up as much as 8% after the announcement, while VMware shares fell as much as 5%. Carbon Black shares rose as much as 6% after the shares were initially stopped after trading closed.
These are VMware's biggest acquisitions yet. The agreements build on VMware's strength and help companies run their software in their own data centers. They can help VMware compete better in the security market and hybrid cloud infrastructure operations.
VMware does not talk about cost synergies that could come from buying two other company-focused companies. However, CEO Pat Gelsinger told CNBC that the companies will operate profitably under VMware next year.
Gelsinger said that by year two, Carbon Black and Pivotal will have contributed more than $ 1
Also on Thursday, VMware announced earnings for the second quarter of fiscal year 2020. The company reported $ 1.60 earnings per share, excluding certain items, of $ 2.44 billion in revenue. Analysts polled by Refinitive had expected $ 1.55 in earnings per share, excluding certain items, of $ 2.43 billion in revenue for the quarter.
Carbon Black Vault VMware for Endpoint Protection
Carbon Black was founded in 2002 and debuted on Nasdaq under the symbol "CBLK" in May 2018. The company offers anti-malware and endpoint protection products that can look at many of the company's devices and tell them about has been hacked.
In the last quarter, Carbon Black reported a loss of $ 0.13 per share, excluding certain items, of $ 60.9 million in sales, with 19% annual sales growth. Carbon Black shares increased by 2% over the past year.
Carbon Black shareholders will receive $ 26 per share in cash from VMware for a total of $ 1.9 billion in cash. The price per share is 14% higher than the stock's closing price of $ 22.75 on Wednesday.
The endpoint security market is crowded, and Carbon Black competes vigorously with rivals such as Crowdstrike, Cylance, Fortinet and Symantec. The space has been ripe for consolidation in recent years, especially from traditional hardware companies. Blackberry bought Cylance in 2018 in an effort to increase its new business proposition as a cybersecurity company, and Broadcom said it would acquire Symantec's business operations earlier this month.
Although crowded, the endpoint protection market is also poised for growth. While several different devices go online – including multiple business-owned devices – further enabled by 5G technology, it does mean more and different endpoints that can serve as a gateway for criminals.
Carbon Black touted its relationship with VMware as well as IBM when it filed to go public last year. CTFN reported earlier this month that Carbon Black hired Morgan Stanley to explore the opportunities to sell itself. CTFN also reported that Cisco and IBM had expressed interest, according to Bloomberg.
Gelsinger did not confirm that Carbon Black spoke with Cisco or IBM, but stated that public companies carry out "customary market checks" to ensure that a deal is favorable.  Carbon Black's CEO, Patrick Morley, will run a security unit that VMware forms, and VMware will move some existing assets into it, Gelsinger said.
He said that VMware has developed a thesis that infrastructure and applications should be secure by default and should not need extra treatment from a security team. Violations happen to VMware's customers even after distributing security products, Gelsinger said. "It doesn't work," he said.
Based in Waltham, Massachusetts, Carbon Black had 1,138 employees at the end of 2018, and customers include Belk, DA Davidson, Evernote and Netflix, according to the company's website.  Pivotal has a long history with VMware
Pivotal and VMware go way back: The company was created from assets spun out by VMware and Dell (VMware's controlling owner) in 2013. The products help companies build and distribute their software on across various server infrastructure, including public clouds. Competitors include IBM, Oracle and SAP, as well as cloud providers such as Amazon and Microsoft. Pivotal's customers include Boeing, Citi, Ford and Home Depot, according to the website.
Pivotal shares have fallen 47% over the past year.
VMware said it is buying Pivotal for a mixed price per share of $ 11.71, including $ 15 per share in cash to holders of Pivotal & # 39; s A share, and an exchange of VMware & # 39; s B -pell for Pivotal B shares owned by Dell. The ratio is 0.0550 shares of VMware's Class B share for each share of Pivotal's Class B.
The news of the Pivotal acquisition is not a complete surprise, as VMware said last week that an agreement to buy all outstanding Class A shares in Pivotal. Dell is majority owner of both Pivotal and VMware, and both VMware and DellEMC contributed assets to Pivotal when it was formed in 2013.
VMware pays $ 800 million in cash for Pivotal, and Dell will now own 81.09% of VMware as a result of the agreement. However, Gelsinger said the Pivotal agreement is not part of any plans to make VMware a wholly owned subsidiary of Dell.
"Dell is extraordinarily supportive of an independent VMware," Gelsinger told CNBC.
"Customers began to say:" I depend on PCF [the Pivotal Cloud Foundry product] and PaaS [platform as a service] from Pivotal. I'm addicted to VMware. I don't see you being as integral to the complete solution as I want you to if I am to commit to my next generation of application development, & # 39; & # 39; said Gelsinger. "I need to have higher integration and higher speed on these pieces working there." They encouraged us to take this step. "
Gelsinger said the Pivotal agreement follows the acquisition of Heptio, which was founded by two of the creators of Kubernetes open source project to manage container software – an alternative to virtual machine technology that VMware popularized. Cloud infrastructure providers offer services to handle containers on a scale across servers, so developers don't have to worry about complexity, and Heptio helped some companies use Kubernetes.
Pivotal also offers products to work with Kubernetes – a product called Pivotal Container Service that VMware and Google worked with in collaboration with Pivotal.
"Heptio was very much, & # 39; Oh, what are you doing? & # 39;" Gelsinger said. As he asked the VMware board for hundreds of millions of dollars to make the Heptio deal, they asked him what to do with it, he said.
Pivotal had 2,949 employees as of February 1. In the last quarter Pivotal reported a loss at 3 cents per share, excluding certain items, at $ 185.7 million in sales and lower than expected guidance, and sent shares lower.
JP Morgan was VMware's financial advisor in both acquisitions.
This is news. Please check for updates.
– CNBC's Kate Fazzini contributed to this report.
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