Thanks André
One of the VMs have snapshots. I guess we have to clear the snapshot prior to copying.
Also, I have a query regarding your point 3.
"copy all the small files (except for the .vmdk files) to the new datastore/folder (using either the Datastore Browser or the command line)"
Can the vmdk's also be copied from the Datastore browser? If yes , I can avoid using vmkfstool -I (point 4)
-Rahul