AirWatch

Why VMware bought AirWatch for $1.54 billion

January 24, 2014: 1:45 PM ET

"The time to invest in mobile is now, " VMware's CFO tells us.

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FORTUNE -- The executives at VMware (VMW) are riding high this week, much like a groom-to-be walking out of a jewelry store with engagement ring in hand. The sixteen-year-old U.S. software company, which specializes in cloud computing and virtualization for large businesses, has every reason to feel elated (and a little nervous): On Wednesday, VMware announced that it spent $1.54 billion to acquire AirWatch, an Atlanta-based company that has, in a few short years, come to dominate the growing sector called mobile device management.

The nerves come from the fact that the acquisition is the largest in VMware's history. (It also comes just eighteen months after another billion-dollar buy: the virtualization startup Niciria, for $1.25 billion.) The elation? That comes from the fact that the company is finally a major player in the white-hot MDM space, which is considered to be a key way for chief information officers to handle employees' increasing desire to use smartphones and tablets in the workplace. AirWatch software configures employees' mobile operating systems, syncs devices with a central server and manages the installation of applications, giving the IT organization the ability to support several types of devices yet still secure them.

VMware had an extensive mobility stack, but as rivals like IBM and Citrix bulked up with their own MDM acquisitions (Fiberlink and Zenprise, respectively) in recent years, VMware found itself trailing the pack with shrinking growth prospects in its traditional virtualization business. Buying AirWatch catapults the company to the front -- at least as far as scale is concerned -- in a growing market, VMware CFO Jonathan Chadwick told Fortune.

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"As we think of our speed-to-market, we're always balancing organic -- building it yourself -- and inorganic, or acquisition," Chadwick said. "In this case, the market is clearly accelerating. History has taught us over the last few decades is that being number one or two really differentiates you from the crowd. Making sure you are, or can become, the market leader very quickly [is important]."

That ability comes courtesy VMware's immense coffers, totaling $5.84 billion in cash and equivalents as of its most recent quarter. "VMware has the resources to acquire AirWatch and there are plenty synergistic capabilities to bring together," Chadwick said, before conceding: "It was clear that our customers were excited about VMware partnering and finding a better solution. They were looking for a comprehensive solution that only the combination of AirWatch and VMware could bring."

With 1.28 billion smartphones and 665 million tablets expected to be in use by 2016, according to the market research firm Gartner ("Soon there will be more mobile devices than toothbrushes in this world," Chadwick predicted with a chuckle), and PC sales steadily declining, VMware is essentially buying its way into the future.

"There's a clear separation from being in pole position and following on," Chadwick said. "AirWatch has a very wide customer spread -- over 10,000 worldwide. They have significant penetration -- financial services, government, healthcare. What was particular exciting is that they have nearly double the number of customers as their next competitor."

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