VMware a compelling pursuit for Cisco

By Anupreeta Das

NEW YORK (Reuters) - Cisco System Inc's (CSCO.O) pursuit of virtualization software maker VMware Inc (VMW.N) could be more serious than many on Wall Street believed, as the network equipment maker searches for new sources of growth.

Cisco has long coveted VMware, whose software helps computer servers run more efficiently and frees companies from having to maintain huge data centers. It went so far as to hold informal talks last summer to buy VMware's parent EMC Corp (EMC.N) according to a person familiar with the matter.

The companies did not move into formal negotiations, and tight credit markets make financing the purchase of a $25 billion company difficult these days. But things could change quickly if EMC decides to put VMware on the market.

"This is a logical deal to do," said a West Coast technology banker. "The question is, is it strategically compelling enough in this environment?"

Spokesmen for Cisco and EMC declined to comment.

Jefferies & Co analyst Katherine Egbert said VMware shares rose on expectations that Cisco might buy EMC.

Trading volume for VMware also picked up in the equity options market on news of Cisco's interest in the company, according to Frederic Ruffy, option strategist at website WhatsTrading.com.

Virtualization is considered a hot technology that is changing the way companies store and manage their data. For Cisco, VMware could bring in a new source of revenue as the maker of switches, routers and other equipment -- the plumbing that manages much of Internet traffic -- faces maturing markets across its products and services.