VMware-Pivotal deal confirmed at $2.7 billion -- what's next?

The VMware-Pivotal combination is confirmed, one week after the companies revealed a deal was in the works.

Under the $2.7 billion acquisition's terms, VMware will pay $15 per share for Pivotal's outstanding Class A shares, along with a Class B stock swap between VMware and Dell Technologies, which holds a majority stake in both VMware and Pivotal.

Along with the companies' familial ties, Pivotal's recent financial results make the acquisition even less surprising. In June, Pivotal's stock dropped sharply after it failed to meet revenue expectations for its first fiscal quarter of 2020, and chopped its outlook for the full year.

VMware spun off Pivotal, known for its version of the open-source Cloud Foundry PaaS, in 2013. The combined company could land bigger overall deals with enterprises, since it can approach both IT infrastructure executives and application development team leaders at once.

But the challenge for VMware going forward is whether to push its Kubernetes distribution, Pivotal Container Service (PKS), or Pivotal Cloud Foundry. The latter's popularity seems to be waning, according to some observers.

We have the opportunity to bring these next-generation developer platform and infrastructure services … to a much, much larger market.

"We believe we have the opportunity to bring these next-generation developer platform and infrastructure services all based around Kubernetes to a much, much larger market than was ever possible before, and that's where VMware's enterprise credibility and reach will come to great benefit," VMware CEO Pat Gelsinger said on a conference call with financial analysts.

Pat Gelsinger

The VMware-Pivotal deal highlights consolidation in the cloud-native market, particularly around Kubernetes, said Jay Lyman, an analyst with 451 Research, which is based in New York. This dynamic played out in acquisitions such as Red Hat's purchase of CoreOS and IBM's $34 billion bet on Red Hat, among others, he added.

"These deals involve some of the top players in the cloud-native ecosystem, so the consolidation has significant implications for customers of both acquirers and acquired companies," Lyman said.

It also ties into VMware's broader strategy to expand its footprint well outside core virtualization technologies such as vSphere. In that vein, VMware said it would also buy security vendor Carbon Black for $2.1 billion.

VMware is expected to share more details of both acquisitions during its VMworld conference next week in San Francisco. Customers on both sides may have lots to say about the future VMware-Pivotal combination.