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Cisco to take small stake in virtualization company

Cisco said it will pay $150 million for a stake in VMware, a unit of EMC.

Cisco Systems said it will pay $150 million for a small stake in a virtualization software company called VMware, which operates as a unit of storage giant EMC.

Cisco's stake in the company will be about 1.6 percent. VMware is the leader in what is turning out to be a hot market. The division makes software that allows a computer or server to function as if it were several. The software emulates features of a computer, which makes it easier to run multiple operating systems and applications on a single machine. Companies benefit because the software allows them to use more computing power out of individual computers and servers. It reduces the number of new machines they have to buy, which can often provide huge capital savings as well as operational savings, especially in reducing energy costs.

Analysts say that VMware has about 85 percent market share in the virtualization business at the moment. The market is expected to grow to about $20 billion annually in the next few years.

VMware is so hot now that EMC is preparing to spin off 10 percent of the unit in an initial public offering. EMC reported on Tuesday that VMware grew sales 89 percent to $298 million in the second quarter compared to the previous year.

Earlier this month, Intel agreed to invest $218.5 million in VMware. Meanwhile Microsoft, the largest potential rival to VMware, is gearing up to challenge the company. But Microsoft has already postponed the public beta version of its main product that is supposed to rival VMware's software. It's expected to be out in the second half of this year.

Cisco, which primarily makes switches and routers that shuttle IP traffic around networks, is interested in VMware because it will help Cisco's corporate customers run their data centers more efficiently. Once the deal is complete, Cisco will have less than one percent of the outstanding voting stock in the company, but VMware has agreed to consider naming a Cisco executive to its board once it goes public.