VMware to buy mobile security firm AirWatch in $1.54 billion deal-Reuters

(Reuters) – Cloud software maker VMware Inc said it would buy privately held mobile security company AirWatch in a deal valued at about $1.54 billion to tap into rising demand for software security.

Mobile security products are in high demand as companies increasingly allow employees to use their own smartphones and tablets for business.

Atlanta-based AirWatch, whose rivals include Cytrix, MobileIron and FrontRange, says it has more than 10,000 customers including United Airline, Renault, and nine of top 10 U.S. retailers.

“With mobile device usage becoming more prevalent in the workplace, we believe this acquisition will prove strategic in complementing and enhancing VMware’s end-user computing business,” ISI Group analyst Brian Marshall said in a note.

VMware, whose shares were up 2.5 percent, said it would pay about $1.175 billion in cash and about $365 million in installment payments and assumed unvested equity. VMware will borrow $1 billion from parent EMC Corp to pay for the acquisition.

“AirWatch will be the center of our mobile activities,” CEO Pat Gelsinger told Reuters. “We are really bringing together the strength we have in PCs and desktops with AirWatch’s in the mobility space.”

AirWatch is VMware’s second billion-dollar deal in one-and-a-half years after the company bought Nicira, a provider of network virtualization software, in 2012.

Last month, IBM completed the acquisition of Fiberlink Communications, a cloud-based mobile device management software provider, for an undisclosed amount.

ABI Research says total expenditure for mobile security management applications and services would double to more than $1 billion by 2015. (r.reuters.com/cuf36v)

AirWatch is expected to add about $75 million revenue to VMware in 2014 following closure of the deal in late first quarter. VMware expects the acquisition to add to adjusted profit in late 2015.

VMware also said it would provide a bridge loan of $25 million to AirWatch if the deal fails to close by June 1.

AirWatch, founded in 2003, will become a unit of VMware and its 1,600 employees will continue to report to AirWatch founder and Chief Executive John Marshall. AirWatch co-founder and Chairman Alan Dabbiere will report to VMware CEO Pat Gelsinger.

Analyst Brian Marshall said AirWatch had raised about $225 million in funding from Insight Venture Partners and Accel Partners. “AirWatch revenue last year may have been in the $125-$150 million range,” he said.

VMware forecast revenue of $5.94-$6.1 billion in 2014. Analysts expect revenue of $5.95 billion in 2014, according to Thomson Reuters I/B/E/S. It said it expects first-quarter revenue of $1.33-$1.37 billion, largely above analysts’ average estimate of $1.34 billion.

VMware also said its fourth-quarter adjusted revenue rose about 20 percent to $1.48 billion as it sold more licenses to enterprise customers. Analysts were expecting $1.47 billion.

VMware, which has been adding more enterprise customers and renewing enterprise licensing contracts at a higher rate over the last year, said license revenue rose about 18 percent to $687 million in the quarter.

VMware sells virtualization software, which enables the creation of a virtual machine that acts like a real computer with an operating system. This helps companies use server and storage space more efficiently and reduce IT costs.

VMware shares were up at $99.71 on the New York Stock Exchange on Wednesday morning.

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