Intel is to buy a $218.5 million stake in the software firm VMware, bolstering the companies' existing agreement to run VMware's virtualisation software on Intel's processors.

Intel has been selling chips since November 2005 with specialised technology that allows enterprise IT managers to use a VMware application that treats each hardware platform as multiple "virtual" platforms. The companies also co-operate on their marketing and product development strategies.

The chip giant will make the purchase through its investment arm, Intel Capital, subject to approval by U.S. anti-trust regulators.

The purchase will be part of an IPO, in which VMware plans to sell 10 percent of the company. VMware has not set a date for that sale, but it is expected to happen in the second half of 2007.
In addition to purchasing stock, Intel will also gain the power to appoint one of its executives to the VMware board of directors. However, Intel will still hold a minority stake in the company, with just 2.5 percent of VMware stock, according to an IPO registration form filed Monday by VMware with the U.S. Securities and Exchange Commission.

The majority of VMware stock - 89 percent - will be held by EMC, the enterprise data storage company that acquired VMware in January 2004. That investment has paid off well, since VMware has grown quickly. VMware revenue rose 82 percent last year, from $387.1 million in 2005 to $703.9 million in 2006.

Coming so close to VMware's stock offering, Intel's investment is likely to generate greater demand for the new stock, and for the virtualisation industry in general, one analyst said.

"Intel likes to know it has a more personal stake, instead of waiting for market forces to advance the application of virtualisation software," said Richard Doherty, research director at The Envisioneering Group. "It's not like that money was gathering dust on their shelf, but Intel's venture arm tends to trigger others to invest in an industry sector too."

The purchase also underlines a growing problem for software firms that have historically charged their licensing fees per processor, Doherty said. In this age of quad-core chips and virtualised server networks, that model could spell trouble for enterprise software providers, who could see their customers doing more work with fewer seats of software. By taking a stake in VMware, Intel is indicating that it sees virtualisation firms claiming some of that revenue.