VMware buying SpringSource for $420 million

By Jim Finkle and Clare Baldwin

BOSTON/SAN FRANCISCO (Reuters) - Business software maker VMware Inc has agreed to buy privately held SpringSource for $420 million, its biggest-ever acquisition, to beef up a portfolio of programs that help companies run data centers.

VMware said on Monday the deal would hurt non-GAAP profitability through at least 2010, but not have material impact on 2009 revenue.

VMware, the 11-year-old subsidiary of EMC Corp became one of the world's biggest software makers by selling virtualization programs, which boost the efficiency of computer servers by replacing multiple pieces of equipment with one machine.

Buying San Mateo, California-based SpringSource, which sells software tools that companies use to write in the Java programing language, helps VMware diversify into other areas.

"We wouldn't do this transaction if we didn't fundamentally believe it would fuel growth and our strategic position with customers," said company spokeswoman Mary Ann Gallo.

Chief Financial Officer Mark Peek reaffirmed VMware's third-quarter guidance for revenue between $465 million and $480 million and said annual 2009 revenue was still on track for one percent to 3 percent year-on-year growth.

But he cautioned that, while VMware's non-GAAP operating margin -- which generally strips out exceptional items -- should still fall within guidance of 20 to 22 percent in the third quarter, it could be hurt by 100 basis points in the third and fourth quarters.

The GAAP impact would be more pronounced due to purchase accounting and stock-based compensation for SpringSource employees, he added.

SOFTWARE COMPLEMENTS

SpringSource sells software tools that companies use to write in Java, one of the world's most widely used programing languages. They compete with products from Red Hat Inc.

"By some estimates, half of new Java application development work is being done in the Spring environment," VMware Chief Executive Paul Maritz said in a conference call with investors.

In the near term, Maritz said VMware would not favor the Spring platform over other platforms.

But "in the long run . . . innovation is most efficiently done when you have both parties sitting in the same tent."

Katherine Egbert, an analyst with Jefferies & Co., said SpringSource programs complemented VMware's other software.

Palo Alto, California-based VMware said it would pay $362 million in cash and equity for SpringSource and assume $58 million in unvested stock and options. The company said it expects the deal to close in September and be cash-flow positive in the first half of 2010.