Cisco's (CSCO) Pursuit For VMware Heats Up

February 11, 2009 12:09 PM EST

Cisco System's (Nasdaq: CSCO) pursuit of VMware (NYSE: VMW) could be heating up as Cisco is raising $4 billion in a debt offering.

Cisco has long desired to own VMware, in fact, Reuters reported that Cisco went as far as to hold informal talks with VMware's parent EMC Corp (NYSE: EMC) last summer. The companies did not move into formal negotiations, and tight credit markets make financing the purchase difficult these days. But things could change rapidly if EMC decides to put VMware on the market.

Cisco is looking for new sources of growth and it may think that VMware could be a company that could help continue Cisco's growth as the industry Cisco competes in is maturing across all markets. VMware helps computer servers run more efficiently and frees companies from having to maintain huge data centers.

Cisco already owns 1.7% of VMware stock and has a market value of approximately $10 billion. EMC previously said it had no plans to sell or spin off its 84% stake in VMware, but management is expected to give an update on the company strategy at its investor meeting on March 10.

Cisco CEO John Chambers did say he plans to be acquisitive through the economic downturn. Cisco does have approximately $29 billion of cash and securities, but on Monday launched a surprisingly large $4 billion debt sale which raised speculation that Cisco could be hunting to buy a company right now.

A person who is familiar with Cisco's line of thinking said, "They're taking advantage of low interest rates, and figuring they might as well get the money while it's there." The person said that it was unlikely the debt issue is tied directly to any plan for EMC.

Some are saying Cisco does not want to compete with its large customers and that is one of the reasons Cisco will not buy VMware or EMC. If Cisco buys VMware, it would begin competing with Microsoft (Nasdaq: MSFT) and if Cisco buys EMC (NYSE: EMC), then it would go up against Hewlett-Packard (NYSE: HP) and IBM (NYSE: IBM). The person familiar with Cisco's thinking said the company has plans for small and medium-sized acquisitions not large corporations.

On the other hand, Cisco has launched only one other debt offering in its history, which was in 2006, to finance its $7 billion acquisition of television set-top box maker Scientific-Atlanta.

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