VMware Buying Carbon Black And Pivotal Software For $4.8 Billion Total

By Amit Chowdhry ● August 22, 2019
  • VMware announced it is acquiring Pivotal Software and Carbon Black for a total of $4.8 billion: Pivotal for $2.7 billion and Carbon Black at $2.1 billion.

VMware has announced it is acquiring Pivotal Software and Carbon Black. Pivotal is a leading developer platform for building modern applications and Carbon Black is a leading next-generation security cloud provider.

The Pivotal Software deal is based on a blended price per share of $11.71, comprised of $15 per share in cash to Pivotal Class A stockholders, and VMware’s Class B shares exchanged for Pivotal Class B shares owned by Dell Technologies at an exchange ratio of 0.0550 shares of VMware Class B common Stock for each share of Pivotal Class B common stock. And the transaction has an enterprise value of $2.7 billion.

ADVERTISEMENT

And VMware and Carbon Black have entered into a definitive agreement under which VMware will acquire Carbon Black through a cash tender offer for $26 per share, representing an enterprise value of $2.1 billion.

“Building on another solid quarter, we are thrilled about announcing our intent to acquire Pivotal and Carbon Black,” said VMware CEO Pat Gelsinger in a statement. “These acquisitions address two critical technology VMware priorities of all businesses today — building modern, enterprise-grade applications and protecting enterprise workloads and clients. With these actions we meaningfully accelerate our subscription and SaaS offerings and expand our ability to enable our customers’ digital transformation.”

ADVERTISEMENT

Pivotal and Carbon Black are addressing key strategic IT priorities for VMware — building apps with a modern approach and protecting enterprise workloads and clients. With Pivotal, VMware will be able to deliver an integrated modern apps portfolio combining Pivotal’s next-generation developer platform and VMware’s Kubernetes portfolio. With Carbon Black, VMware will be able to provide a next-generation security cloud with Carbon Black’s protection suite and VMware’s intrinsic security assets.

By adding these companies to VMware’s portfolio, it will the company to deliver software solutions that enable customers to build, run, manage, connect and protect any app, on any cloud and any device.

“The VMware Board of Directors is committed to creating value for all stockholders,” stated Karen Dykstra, the Chairperson of the Special Committee of VMware’s Board of Directors. “After a thorough and independent evaluation with its advisors, and working closely with the VMware management team, the Special Committee recommended the Board approve this transaction with Pivotal given its strong strategic and long-term value to the company and its customers.”

Pivotal Merger Agreement

Under the terms of the Pivotal merger agreement, Pivotal’s Class A common stockholders will receive $15 per share in cash for each share held, and Pivotal’s Class B common stockholder, Dell Technologies, will receive approximately 7.2 million shares of VMware Class B common stock, based on an exchange ratio of 0.0550 shares of VMware for each share of Pivotal. This transaction, in aggregate, will result in an expected net cash payout for VMware of $0.8 billion.

The impact of equity issued to Dell Technologies would increase its ownership stake in VMware by approximately 0.34 percentage points to 81.09% based on the shares currently outstanding. VMware currently holds 15 percent of Pivotal’s fully-diluted outstanding shares. The transaction will be funded through cash on the balance sheet, access to short-term borrowing capacity, and the issuance of approximately 7.2 million shares of VMware Class B common stock to Dell.

“The time is ideal to join forces with VMware, an industry leader who shares our commitment to open source community contributions and our focus on adding developer value on top of Kubernetes,” commented Pivotal Labs Inc. CEO Rob Mee. “VMware has a proven track record of helping organizations run and manage consistent infrastructure in support of mission critical applications, and our two companies have already built a strong foundation on our successful VMware PKS collaboration. We look forward to continuing our work with VMware to provide even more value to customers building modern applications.”

Carbon Black Merger Agreement

As part of the Carbon Black merger agreement, Carbon Black stockholders will receive $26 per share cash for each share held, resulting in a net cash payout for VMware of $1.9 billion. And the transaction will be funded through cash on the balance sheet and access to short-term borrowing capacity.

“Today marks an exciting milestone for Carbon Black, VMware and the entire cybersecurity industry,” explained Carbon Black CEO Patrick Morley. “We now have the opportunity to seamlessly integrate Carbon Black’s cloud-native endpoint protection platform into all of VMware’s control points. This type of bold move is exactly what the IT and security industries have been looking to see for a very long time. We look forward to working with the VMware team to continue delivering a modern security cloud platform to customers around the world. Additionally, we’re pleased that today’s transaction provides Carbon Black’s shareholders with immediate and substantial value.”

Morrison & Foerster LLP is advising VMware on its Carbon Black deal. After it is complete, this transaction marks VMware’s first acquisition of another public company. The Morrison & Foerster LLP deal team is led out of San Francisco by M&A partner Brandon Parris with partners Michael O’Bryan, Jessica Isokawa, of counsel Amanda Hines-Gold and San Francisco corporate associates Alexa Belonick, Blair Green, and Marjorie Roesser.

Business Highlights

VMware also announced several major highlights. For example, VMware Cloud on AWS is now present in 16 regions globally with the recent addition of the Seoul and Sao Paulo AWS regions.

And in July, Google Cloud and VMware announced Google Cloud VMware Solution by CloudSimple, a new service that will allow organizations to run their VMware workloads in Google Cloud Platform, providing customers with choice and flexibility to run VMware workloads on-premises, in a hybrid architecture, or in the cloud.

VMware also unveiled VMware HCX Enterprise — which accelerates large-scale live migrations of VMware vSphere and non-vSphere workloads to help customers operationalize multi-cloud and hybrid cloud transformations.

Q2 Financial Performance

VMware also announced that revenue for the second quarter hit $2.44 billion, an increase of 12% from the second quarter of fiscal 2019. The company’s license revenue for the second quarter was $1.01 billion, an increase of 12% from the second quarter of fiscal 2019.

The company’s GAAP net income for the second quarter was $4.93 billion, including a $538 million unrealized loss on strategic investment in Pivotal Software and $4.9 billion discrete tax benefit resulting from an internal transfer of international intellectual property rights ($11.83 per diluted share) compared to $644 million ($1.56 per diluted share) for the second quarter of fiscal 2019.

Non-GAAP net income for the second quarter was $667 million ($1.60 per diluted share), up 4% per diluted share compared to $638 million ($1.54 per diluted share) for the second quarter of fiscal 2019. And GAAP operating income for the second quarter was $523 million, an increase of 3% from the second quarter of fiscal 2019. Plus non-GAAP operating income for the second quarter was $802 million, an increase of 9% from the second quarter of fiscal 2019.

VMware’s operating cash flow for the second quarter was $699 million. And free cash flow for the second quarter was $611 million. VMware’s total revenue plus sequential change in total unearned revenue grew 17% year-over-year. And license revenue plus sequential change in unearned license revenue grew 12% year-over-year.

“We are pleased with our strong financial performance in Q2, which reflected broad-based strength in all three geographies,” noted VMware EVP and CFO Zane Rowe. “Our cloud strategy and strong Hybrid Cloud and SaaS growth will substantially accelerate, as we bring Pivotal and Carbon Black into the portfolio.”

The closing of both transactions is subject to closing conditions and is expected in the second half of VMware’s fiscal year 2020, which ends January 31, 2020.

 

ADVERTISEMENT