The virtualization-software maker's initial public offering is generating plenty of interest. Can it live up to the expectations?
In what could become one of the most successful initial public offerings of the year, software maker VMware went public Aug. 14 with an offering that valued the company at close to US$20 billion, rewarded shareholders of majority owner EMC, and could prove a barometer of investors' appetite for new issues during a summer of volatile stock market swings.
VMware, a subsidiary of computer storage and software company EMC, is selling 33 million shares in an IPO on the New York Stock Exchange. The shares surged early on, rising 76 percent to US$50.95 in late-morning New York trading. That gave the company a market value of US$19.1 billion. The shares had traded as high as $55.
VMware said late on Aug. 13 that shares would go for US$29 apiece, at the high end of the company's forecast range. Citigroup, J.P. Morgan Securities, and Lehman Brothers are the lead underwriters, and the shares traded under the ticker symbo "VMW". Sanford C. Bernstein & Co. analyst Anthony Sacconaghi had said in a Jul. 31 report that VMware shares could soon rise to US$34 or even US$39.50, which would value VMware at US$13 billion to US$15 billion.
Anticipation for VMware's offering has mounted in recent weeks. On Aug. 9, VMware raised the target price range of its shares by US$4, to US$27 and US$29 a share. And two of the tech industry's biggest names have bought in. Intel on Jul. 9 invested US$218.5 million for a 2.5 percent stake in VMware, and will add an executive to VMware's board. On Jul. 27, Cisco Systems said it was paying US$150 million for 1.6 percent of the software maker. VMware technology helps IT departments make more economical use of servers, the powerful computers that run Web sites and corporate data networks.
A Leader in the packVMware's rapid growth and escalating value have led analysts to compare it to software industry high-fliers like Microsoft in their early days. But VMware Chief Executive Diane Greene said in an interview that the landscape has been changed dramatically by the rise of Internet-delivered applications and open-source software. "The tech industry is very different from what it was when they were growing," says Greene. VMware's exacting standards for hiring and product quality have let it stream out "major new innovations on a regular basis", she says. "If we keep executing on that model, it's promising, but it is a different world."
Brent Bracelin, a senior research analyst at Pacific Crest Securities, said he is bullish on VMware because of its large available market, dominant share, and technical advantages over competitors. VMware's sales rose 89 percent in the second quarter. "This is one of the most important software companies since Oracle, Microsoft, and companies that ruled the last decade,"he says. "This is going to be a hot deal."
The scant number of VMware shares on offer could also buoy demand. The offering could raise US$957 million. By contrast, the median amount companies have raised in IPOs through the second quarter of this year has been US$83.6 million, according to market researcher VentureOne, a Dow Jones company.
The IPO could be a boon for investors in EMC, which will own 87 percent of VMware's shares. The company has said it plans to use proceeds to buy back shares of its stock, and EMC could also pay its shareholders a future dividend in VMware shares, Bracelin added. Shares of EMC stock rose 7.5 percent, to US$19.05, on Aug. 13.
Navigating a Competitive MarketAs desirable as VMware's shares may be at the outset, the company will need to use proceeds from its sale to navigate an increasingly competitive market characterized by rapid growth, profit margin pressure, and the imminent entry of software giant Microsoft.
In particular, the sale gives VMware, which already has 3,000 employees, new currency to attract and retain top talent in Silicon Valley, where it is based. VMware employees had been issued options to buy EMC stock, which has languished over the past three years, said Bracelin. "You're trying to recruit the same pool of talent that Google's in, but you're issuing stock that's been dead money for three years," he said.
EMC is spinning out part of VMware into an uncertain environment on Wall Street. Since late July, stock markets have gyrated amid concern over subprime mortgage malaise. Investors have feared that tightening credit could slow corporate growth. That has led the Federal Reserve, the European Central Bank, and other central banks to inject hundreds of billions of dollars into global markets to prop them up.
Validating virtualizationIf successful, VMware's IPO could further validate use of virtualization technology, which is changing the way companies manage their computer systems. Sales of the knowhow is one of the tech industry's fastest-growing areas, according to market researcher IDC. VMware controls about 85 percent of the market for the software on x86 servers using Intel and Advanced Micro Devices chips. Using the software, companies can stack more programs onto each computer server, increasing the machines' efficiency.
That has led to impressive results: VMware booked nearly US$704 million in 2006 revenues, and it is on track for US$1.2 billion in 2007. Over the coming year, VMware's revenues could grow by another 62 percent, outpacing fast-growth firms Salesforce.com, Research in Motion, and even Google, according to Sacconaghi, who said VMware's sales could exceed US$3 billion by 2010. During the quarter ended Jun. 30, revenues grew to US$296.8 million and profits more than doubled to US$34.2 million.
VMware also has been able to charge premiums for add-on products, including one coveted capability that lets customers move computing workloads from an overtaxed machine to a less busy one without interrupting users' work. About 45 percent of VMware's customers license that product, according to John Humphreys, a vice-president at IDC.
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