EMC announces VMware IPO

EMC announced that it plans to spin out approximately 10% of its share of VMware in an initial public offering (IPO) that should close this summer.

EMC plans to sell approximately 10% of VMware in an initial public offering (IPO) of shares of new VMware stock, retaining ownership of the remainder of the company.

Speaking from VMware's headquarters in Palo Alto, Calif., Joe Tucci, EMC Chairman and CEO, said that "VMware's growth has been phenomenal," and that the IPO move was an attempt to "expose this value to EMC shareholders."

EMC purchased VMware in 2004 for $625 million. VMware reported revenues of $709 million in $2006, with Q4 revenue jumping 101% year-over-year. VMware is currently on a $900 million run rate.

Analysts, shareholders and journalists have called for EMC to divest from VMware, under the pretense that VMware's earnings growth was being squandered by EMC's moribund stock value.

In a research note, Bill Shope, analyst with J.P. Morgan, wrote: "EMC's stock has not seemed to benefit from [VMware's growth] at all. Indeed, looking at EMC's market capitalization from 2004 to the third quarter of 2006, we can see that our estimated value for VMware has increased from 2% of the total to 13% in 2006, yet EMC's stock price fell 10% over the same time period."

Tucci cited other reasons to spin out a part of VMware: VMware's ability to recruit and retain employees, and to strengthen VMware's open platform strategy.

VMware CEO Diane Greene said that an IPO was "a powerful way to accelerate our vision of pervasive virtual infrastructure."

In fact, virtualization is already well on its way. Citing third-party research, Greene noted that in 2006, 10% of x86 server workloads ran on VMware already, and VMware was used by over 20,000 customers worldwide to reduce server space, reduce power and cooling costs, enable better disaster recovery and business continuity practices, manage desktops and generally "create a more flexible IT environment."

VMware's growth prospects remain extremely strong. The emerging discipline of desktop virtualization opportunity, for instance, "could be bigger that the server virtualization opportunity," Greene said, because of its manageability, for one, but also for reasons as "far flung as avian flu preparedness."

EMC will file an S-1 statement with the SEC this March detailing VMware's finances.

Let us know what you think about the story; e-mail: Alex Barrett, News Director

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