EMC CEO Joe Tucci

EMC Corp. has put an end to days of speculation by confirming its intentions to buy out Cisco Systems Inc’s share of the Virtual Computing Environment Company (VCE). Once the deal is completed, VCE will be absorbed into EMC’s greater federation of companies.

In a press call this morning, EMC said it’s going to buy out most of Cisco’s shares in VCE before the end of this quarter, though the networking giant will retain a 10 percent stake.

“VCE’s size, scale and market reach now requires a more traditional business structure,” said Joe Tucci, chairman and CEO of EMC, in a statement. “Our commitment to increased investment will enable VCE to significantly expand the scale and scope of its solutions, helping customers take better advantage of hybrid cloud and next-generation IT opportunities.”

Once the dust has settled, EMC’s expanded federation will consist of five companies: EMC, VMware, Pivotal, RSA and VCE.

That is exactly the opposite of what one of EMC Corp’s biggest shareholders, Elliott Management, wants to see. The so-called ‘activist’ investment firm has been agitating in the background for weeks, trying to get EMC to sell off VMware to “maximize shareholder value”, even if it’s to the long-term detriment of both companies. Today’s announcement is a not-too-subtle statement of intent: EMC intends to keep its federation together at all costs.

Whether or not that will dissuade Elliot Management remains to be seen. “The last thing on investors’ minds is the future of VCE,” said Daniel Ives, an analyst with FBR Capital Markets, to Bloomberg. “EMC has a fire in its house right now and the company appears focused on painting its bedroom, while the Street wants a resolution on the strategic ownership situation sooner rather than later.”

What’s next for VCE

VCE sells converged vBlock systems based on Cisco’s networking and servers, EMC’s storage and VMware’s virtualization software. Up until now the company was jointly funded by its two parents – the EMC federation and Cisco – and it’s done well to date. According to Gartner, it’s the industry leader in converged systems, with quarterly revenues surpassing $500 million and 50 percent year-on-year quarterly growth. Equally important is that VCE has driven additional sales of both Cisco’s and EMC’s gear.

So why the sudden shake up? Actually, not all that much has changed. VCE will still do exactly the same thing, but with its own organization structure and mission. It will continue selling its vBlocks. It’ll continue to follow its strategy of “unleash simplicity”.

What is different is that VCE should be more agile without Cisco’s involvement. Cisco’s COO Gary Moore summed it up when he said that VCE is at the top of its market, and to stay on top it needs to move fast as the industry evolves towards hybrid clouds.

Within EMC’s federation, VCE’s reporting chain becomes a lot more streamlined. CEO Praveen Akkiraju will report directly to EMC II CEO David Goulden, which means he can make decisions faster, without waiting for the go-ahead from multiple owners.

“Now that VCE is a $2 billion company looking to expand beyond platforms to deliver hybrid cloud solutions, it’s critical to evolve to a structure that supports our broader mission from the technology and financial perspectives,” said Akkiraju.

Cisco still gets access to an important sales channel, and it was clear that vBlock will continue to be a joint Cisco, EMC and VMware effort. VCE will push forward with a number of new products already planned, including an ACI-enabled vBlock.

“As EMC, Cisco and VCE all look to build solutions and deliver solutions for a software-led and cloud-enabled world, there will be plenty of opportunities to work together,” wrote Wikibon analyst Stu Miniman in a professional alert. “VCE, EMC and Cisco all face threats from open source and hyperconverged (aka Server SAN) offerings; this restructure of ownership should enable – not limit – options of embracing/attacking new opportunities.”

We can only speculate about what the new VCE will achieve, but if its second incarnation is as successful as its first, backers and customers alike will see plenty of rewards.

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