Neither company is saying a thing yet, but word is Cisco Systems (NASDAQ: CSCO) and EMC (NYSE: EMC) are joining up to sell a new collection of products designed to deliver cloud computing capabilities, Reuters reports. Called vBlock, the cloud solution is intended to help the companies compete more effectively with IBM (NYSE: IBM) and Hewlett-Packard (NYSE: HPQ).

The partnership, which no one is admitting to, involves a joint venture between Cisco and EMC that will sell vBlock. The former will supply the networking equipment and servers, with the latter kicking in the storage gear and virtualization technology through its VMWare (NYSE: VMW) subsidiary. The joint venture will put the systems together, integrate the components for clients, and make the whole pile of cables and silicon work. A formal announcement is expected next week.

With billions in the bank and a broad technology platform, Cisco (NASDAQ: CSCO) has been fairly clear that a big priority is M&A. And this week, we got another deal: the $105 million purchase of Tidal Software.

Tidal develops sophisticated data center software solutions -- helping to manage diverse applications, such as from Oracle (NASDAQ: ORCL), SAP (NYSE: SAP) and Microsoft (NASDAQ: MSFT).

Of course, Tidal's business is a nice complement for Cisco, which is getting aggressive in the server market.

It seemed like a done deal. But in the high-stakes M&A game, things can easily fall to pieces.

Just look at IBM (NYSE: IBM). Over the weekend, the firm withdrew its $7 billion bid for Sun Microsystems (NASDAQ: JAVA). It's yet another heart-breaker for beleaguered Sun shareholders.

Actually, according to the Wall Street Journal [a paid publication], it looks like IBM was the only company interested in a deal. So, even though Sun had little negotiating leverage, it acted as though it had a lot – that is, by holding out for a higher valuation and firmer deal protections (such as "change of control" clauses that provided Sun execs with lush payouts). Well, I guess IBM didn't need Sun that badly or if anything, was certainly willing to play hardball.

With close to $40 billion in annual sales, Cisco (Nasdaq: CSCO) really has no choice but to focus on multi-billion dollar market opportunities. And, according to a recent piece in the NYTimes, it looks like the next target is the massive server market (about $50 billion or so).

It's a worthy goal. Plus, Cisco has the credibility and distribution muscle to get critical mass.

But that's only a piece of the puzzle. After all, Cisco relies heavily on an ecosystem of partnerships. So, by moving into the server market, there's a risk of destabilizing things, especially with Hewlett-Packard (NYSE: HPQ), Dell (Nasdaq: DELL) and I.B.M. (NYSE: IBM).

However, to keep things growing, Cisco needs to get a chunk of the server market. And the good news is that the market is undergoing a distruptive change: virtualization. Essentially, this is sophisticated technology that increases the productivity of servers. It's a powerful value proposition for cash-strapped customers.

Moreover, Cisco can put together a compelling offering; that is, by bundling networking software and tools.

It's certainly a serious threat and it's a good bet that HP, Dell and IBM will respond. In fact, one idea is to buy up networking operators – which will likely spur a new round of consolidation in the tech space.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Streetsmart Guide to Short Selling: Techniques the Pros Use to Profit in Any Market. He is also the founder of BizEquity, a valuation website.

An IPO does not come any hotter than VMware (NYSE: VMW). After popping out of the box at just over $51, the shares moved up to over $125 in just four months. That gave the company a market cap of about $45 billion and the stock was trading at 40x sales.

It did not take long for those days to be over. VMware shares now change hands at $71.44. Wall Street changed its opinion on the company in less than two months.

So why the change of heart? According to Barron's it may be a flaw in the company revenue model. Its customers buy big enterprise licensing covering more server installations than they have, figuring that they will grow into the license. Cowen's William Pritchard told the news magazine that this method of doing business promotes "often forward buying more capacity than they intend to deploy initially, but instead securing a more favorable price for the software through the larger and long-term commitment." That would mean VMware's revenue could be undermined a year or two out. Cowen thinks the bad fruits of this kind of license will begin to show up in the second quarter of next year.

Or the stock could simply go lower on its current valuation.

Despite the move down in price, VMW still has a forward P/E of almost 62 and still trades at 24x revenue. If the company even has a tiny miss on its next quarter numbers or its guidance gets cut down, the shares could see the $50s again.

Douglas A. McIntyre is an editor at 247wallst.com.

Although Dell, Inc. (NASDAQ: DELL) has slowly risen from the depths in 2007, the company still has a long way to go in order to regain former growth rates and again challenge competitor Hewlett-Packard Co. (NYSE: HPQ) for the world's largest computer maker crown.

Last week at a ZDNet forum, company CEO and founder Michael Dell said that the company he now leads again has seen an increase in server sales powered by the Linux operating system. Linux is a freely available software operating system that runs more web servers globally than any other platform, although Microsoft Corp. (NASDAQ: MSFT) likes to ignore that fact as it trumpets its own Windows Server products. Both operating systems are fine products that are battle tested -- though one is free and the other is not.

But does that mean Dell is set for a triumphant return as 2008 approaches? Some don't think so, since it seems likely that Dell's server products will experience a sales decline in the coming six months. Dell resellers may also be planning to stock less of the company's server products in that same time frame as well.

Sun Microsystems (NASDAQ: SUNW) volatility elevated into 9/5 financial analyst meeting.

SUNW is flat at $4.86. SUNW, which will change its symbol to JAVA on 8/27, will have an analyst meeting in New York on 9/5/07. The company has announced a $3 billion stock buyback on 5/16/07. SUNW recent market cap is $17.3 billion. SUNW over all option implied volatility of 45 is above its 26-week average of 38 according to Track Data, suggesting larger price risk.

Rackable Systems (NASDAQ: RACK) volatility flat on renewed buyout chatter.

RACK, a provider of servers and storage products, is recently up $0.65 to $12.62 on unconfirmed and renewed deal speculation. SUNW & DELL have been frequently chattered as interested in RACK. RACK call option volume of 2,690 contracts compares to put volume of 250 contracts. RACK September option implied volatility is at 47, October is at 51 and December is at 56, above its 26-week average of 55 according to Track Data, suggesting non-directional and less price risk.

Daily options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.

It has been reported in China Tech News that Dr. Kai-Fu Lee, president of Google (NASDAQ: GOOG) China claims Google will be moving some servers to China in an effort to better serve that country. I have yet been unable to confirm Lee's claim. At this point it appears to be mostly optimistic speculation on Lee's part although the move would have significant advantages for Google in serving the Chinese sector of its market and the growth it needs there.

Google is not the largest search entity in China. Putting servers in that country would establish a tangible presence there and enhance the company's branding efforts in China. Lee also claims that Google would be offering free mapping services to China mobile users. At present, mobile communications are exploding in Asian markets.

Drawbacks to this reported move by Google would include exposure to significant risks which Google will need to aggressively address in order to make the move successful. Data security is less than optimal in China and being that a communist stronghold requires a different level of information disclosure than the free world is used to, Google would be playing in an arena which is governed by a whole different set of rules. Additionally, spurred by stiff competition in China's technology sectors, the Chinese government has had to initiate actions to deal with an influx of infrastructure vandals who are damaging transmission lines and equipment there.

An old science fiction short story goes: An advanced civilization builds the biggest computer in the universe. It houses all information and knowledge.

The computer's inventor says:  "Is there a god?
The computer answers:  "There is now."

Of course, this is a common theme in science fiction is:  computers that gain consciousness and do bad things. Some are classics, like 2001: A Space Odyssey or War Games.

Well, according to a recent piece in the New York Times, Google wants to built the world's biggest, smartest and most efficient computer. Hopefully, they plan to abide by their mantra to do no evil.

Popular wisdom is that Google is just about software.  Not really.  In fact, if you look at the history of the co-founders, Larry Page and Sergey Brin, they spent considerable time building the ultimate computer by using cheap spare parts and reading up – in the Stanford library – on supercomputer research.  Some of the co-founders' innovation were brilliant, such as using Velcro to join racks of servers (Google even got a patent on this last year).

So long as big piece of Google's revenues come from advertising, it is absolutely critical to protect its search franchise.  This was the driver for Google's $1 billion investment in AOL.

Another recent deal was with Dell, in which Google gets a special default web page. Of course, it will have the Google search box.

Basically, Google is concerned that Microsoft will make its search system a default when it releases its new browser.

Well, as of last night, we have more insight into the Google-Dell deal.  That is, Google will use Dell servers for its corporate search product.  While the Google product is getting traction, it is still a niche product – and will likely not move the needle at Dell.  However, it is nonetheless important for Dell.  The company is trying to break into the higher-end server markets.

Microsoft's attorneys stayed on the attack in the appeals court on Wednesday and used a bank vault analogy to make their point.  Yesterday it was shoe laces.  Getting very creative aren't they?

In today's session, the Financial Times reports that Microsoft accused the European Commission of “the biggest encroachment on intellectual property in European competition law history.”  Microsoft's attorney compared the EU's antitrust ruling to “opening the vaults of a bank” and giving away money to people who passed by.  I think that's going a bit too far, but its does make for an interesting analogy.

The issue being discussed was interoperability with windows servers.  The EU wants Microsoft to release information necessary for its competitors to develop server software that can operate smoothly on Windows-driven servers.  Microsoft's attorney's say that the EU's order to release 12,500 pages of interoperability information infringed on the company's patents without proper justification.

Tomorrow the justices get their chance to ask questions.  Wonder how tough they'll be?  Tune in tomorrow to find out.