Behind the Deal: Under VMware, CloudHealth Aims to Be Household Name

The excitement and sense of triumph were palpable Thursday at CloudHealth Technologies, as the company held a party celebrating its recent move to a new headquarters on the 20th floor of a downtown Boston skyscraper. The source of the heightened atmosphere was no mystery—the enterprise software startup was also reveling in its planned sale to publicly traded VMware, a deal announced three days earlier.

CloudHealth executives aren’t discussing specifics about the acquisition, which hasn’t closed yet. But a source with knowledge of the deal told Xconomy the price was just north of $500 million in cash. That makes it one of the largest Boston-area tech acquisitions of the year, and a notable one in cloud management and analytics. In the past three years, other deals in cloud infrastructure have included HPE’s purchase of Cloud Cruiser, Kaseya’s acquisition of Unigma, and Cisco’s purchase of CliQr Technologies.

At the party, CloudHealth’s leaders expressed enthusiasm for the future with VMware (NYSE: VMW), while reflecting on their six-year-old company’s journey.

Tom Axbey

“This is a very proud moment for the company,” said CEO Tom Axbey, a former IBM and Rave Mobile Safety executive who was hired almost a year ago to run CloudHealth. “It’s been a monumental week.”

CloudHealth was started in 2012 by engineering guru and chief technology officer Joe Kinsella (top picture), formerly of Sonian and SilverBack Technologies (which was bought by Dell in 2007); finance expert Dave Eicher, previously with GenArts and SilverBack, who now serves as CloudHealth’s executive vice president of customer support; and Dan Phillips, the former chief executive of SilverBack and former chief operating officer of Concord Communications. Phillips served as CEO of CloudHealth until it brought on Axbey; Phillips remained chairman.

The idea behind CloudHealth was to help businesses “plan their entire cloud ecosystem,” Phillips has said, by offering software tools for analyzing and managing the cost, usage, security, and performance of private and public cloud computing options.

The company’s approach won it more than 3,000 customers, including Yelp, Dow Jones, and Zendesk. Axbey declined to share specific figures, but he said CloudHealth’s annual revenues have grown by at least 60 percent in each of the past four years. Along the way, the 300-person company garnered a total of $86 million in venture funding from investors including Kleiner Perkins Caufield & Byers, Meritech Capital Partners, .406 Ventures, Sapphire Ventures, and Scale Venture Partners.

Axbey said CloudHealth still has “plenty of cash” in the bank from its last venture round, a $46 million investment it received last year. When he took the helm, he said the goal was to take CloudHealth public, perhaps as soon as 2019.

CloudHealth celebrates its new headquarters and planned acquisition by VMware. Photo by Jeff Engel.

“We absolutely were not looking to get acquired,” Kinsella said Thursday, sitting next to Axbey on a couch near the entrance to CloudHealth’s new digs.

CloudHealth and VMware executives first broached the topic of a “potential partnership” about 18 months ago, but those talks didn’t yield anything concrete, Axbey said. Earlier this year, the companies began talking again. At some point during the series of meetings, the discussions “became more strategic” as the two sides realized their views of the future of cloud management were aligned, and the companies might be strengthened by teaming up, Axbey said.

The deal “came together very quickly,” he added.

The acquisition talks reached their apex in late August. On the day the companies reached an agreement, Kinsella ate breakfast at one of his favorite spots, Clover, a vegetarian-friendly restaurant chain that has a location a couple of blocks from CloudHealth’s office. Coincidentally, VMware’s internal code name for the deal talks was also “Clover.” As the negotiations began heating up that day, Kinsella said he decided to eat lunch at Clover as well.

“It was a joke in the morning,” Kinsella said about his meal choices that day. By the afternoon, it was “not a joke. I think it might be superstition,” he said.

Kinsella’s dinner that evening? Yup, more Clover. VMware and CloudHealth reached a sale agreement in principle that night, and the deal was officially signed early the next morning, Axbey and Kinsella said.

Given CloudHealth’s previous IPO talk and strong growth claims, did the company perhaps sell too soon—and give up an opportunity to become a bigger independent player? “Time will tell,” Axbey responded, although he seems to like his chances with the new parent company.

“Our plan is to go into VMware and be the centerpiece of their cloud strategy,” Axbey said. “We think it’s a huge accelerant for the company.”

Axbey cited the additional resources VMware will provide, including a larger global reach and a deeper bench of customers and partners. The Palo Alto, CA-based company, which sells virtualization software and cloud tools and services, generated $7.9 billion in revenue last year and turned a profit of $570 million. As of this writing, it has a market cap of nearly $63 billion.

One of the important pieces of the deal is that CloudHealth will operate as a VMware division and keep its brand name, CloudHealth executives said. “We stand a chance of being a household name [in] computing,” Axbey said.

But achieving that will likely require strong business execution and staying ahead of the technology curve. In the coming years, one of the focuses for CloudHealth’s engineers will be developing machine learning tools and related technologies aimed at automating more of the “optimization” of businesses’ cloud operations, Kinsella said.

“We want to free enterprises of the heavy lifting of managing workloads and applications [so they can] focus on their business services,” Kinsella said.

Dan Phillips

For Phillips, a veteran of five startups, a key takeaway from CloudHealth’s exit was that the founders had worked together for years, mostly in IT infrastructure management, and had surrounded themselves with an “ecosystem” of expert partners. Much of what CloudHealth’s founders learned in previous technology cycles has been “so valuable” in the cloud era, even though the tools and market have evolved, Phillips said.

“You want to pick an area of domain expertise, and you want to stay with it and ride that for your career,” Phillips said. It’s going to “recreate itself over and over and over. There’s no need to do something different—it’s going to completely change anyway.”

Trending on Xconomy