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VMware board replaces co-founder and CEO Diane Greene

VMware's board of directors announced abruptly that it has replaced VMware co-founder, CEO and President Diane Greene with EMC Cloud Computing Division President Paul Maritz.

VMware Inc. co-founder, President and CEO Diane Greene has been replaced by EMC Corp.'s Cloud Computing Division President Paul Maritz, effective immediately. The Palo Alto, Calif.-based VMware also announced that it will lower its financial expectations for this year. The news shocked analysts, and within an hour of the announcement, shares fell by $13, or 24%, on Tuesday morning.

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The company issued a short press release this morning about the dramatic leadership change and gave no explanation as to why. In the release, Joe Tucci, the chairman of VMware's board of directors, said simply, "As one of the founders and the leader of VMware, Diane guided the creation and development of a company that is changing the way that people think about computing. The Board thanks her for her considerable contributions to VMware and wishes her every success in the future."

Exactly what that future holds for Greene was not disclosed, however.

Leadership change takes analysts aback
The abrupt leadership change comes as a surprise, because under the Greene regime, VMware single-handedly created the market for mainstream virtualization, and its software dominates the virtualization industry today.

Part of the reason may be VMware's unstable stock values. After its initial public offering in August 2007, VMware stock tripled its $29 opening price in just one month. But since hitting that 52-week high of $125.25 in October, shares spiraled down and lost about 70% of their value. Analysts have reported that VMware's stock decline was expected because it was overvalued.

The kind of executive that can lead a startup is not always the best person to have in charge as it transitions into a more mature, stable and profitable entity.
Charles King,
analystPund-IT Inc.

Even so, Illuminata Inc. analyst Gordon Haff said that he was shocked by Greene's sudden replacement. "Diane seems to have done just about everything right with VMware. Yes, the stock is down, but it hardly seems her fault that the stock was bid up to unsustainable levels -- especially in the current economic climate," Haff said.

Pund-IT Inc. analyst Charles King was also caught by surprise but said that over time it is normal for successful startups to change leadership.

"Companies evolve over time, and in the past year, VMware has gone from being in startup mode to having a successful IPO, hitting a billion dollars in revenue for the first time, and it has continued its rapid growth," King said. "The kind of executive that can lead a startup is not always the best person to have in charge as it transitions into a more mature, stable and profitable entity. In fact, it is highly unusual to see a company founder continue in that position year after year; those that do are the exception to the rule."

Maritz brings EMC, Microsoft baggage
Greene's replacement, Maritz, has decades of experience building Microsoft Windows and was "instrumental in building much of Microsoft's success," according to Tucci's statement.

In 2000, after 14 years at Microsoft, Maritz retired from the company. He managed the development and marketing of many of Redmond's most successful products, including Windows 95, Windows NT, and database tools and applications.

In 2003, Maritz founded Pi Corp., a startup software company focused on building cloud-based technology. In February 2008, EMC Corp. acquired Pi Corp, about a year after which EMC also acquired VMware. Maritz then became president of EMC's Cloud Division.

Maritz's place at the VMware helm makes sense, King said. " I think he should be a good replacement," King said. "He was with Microsoft when it went through the kind of rapid growth that VMware is now … and had his hands on two of the company's most successful products."

Maritz's experience in cloud computing also makes him a good fit for VMware, given the company's recent focus on the trend. Just a couple of months ago, Greene delivered a keynote address at the Morgan Stanley Technology Conference in Boston explaining that VMware is now focused on the next evolution of virtualization, cloud computing, while the competition is still focused on server consolidation.

Analysts also speculate that Greene was replaced to prepare for virtualization newcomers like Microsoft's Hyper-V and Citrix's XenServer, which have put pressure on the company, especially when it comes to virtualization software pricing. Previously, Greene and other VMware representatives held firm to the idea that Citrix and Microsoft would not have a significant impact on VMware sales given VMware's strong reputation and huge lead in the market.

King noted that VMware's role as a public company changes the company's dynamic with competitors and role in the marketplace. "VMware … has some significant challenges ahead," King said. They are pushing hard into new areas like virtual desktops and cloud computing, and the company is dealing with some serious competition with Hyper-V," King said.

Still, Haff said Greene's departure – or ousting, as the case may be - was unwarranted. "Yes, Microsoft is going to put increased pressure on VMware. But again, what could Diane or anyone else do differently? Drop a nuke on Redmond? There's obviously a back story here," Haff said.

That back story may be a power play between Greene and EMC CEO Joe Tucci, who have been known to be at odds. Despite leading VMware to a successful IPO last year, the Hopkinton, Mass.-based company has had limited involvement with VMware to date. Some reports indicate that Greene kept the information storage and management company at a distance to minimize the risks of association with EMC. Now that Greene is gone, that may change. "It certainly looks like EMC is about to exert more control, which Diane long resisted," Haff said.

VMware revises earning expectations
VMware expects to announce earnings for the quarter ended June 30, 2008, as scheduled on July 22, 2008, at 2 p.m. PDT. On that call, Maritz, who was also named to VMware's board of directors, will discuss the second half of 2008. The company will not officially update "guidance" for Q2, but it expects revenues for all of 2008 to be modestly below the previous guidance of 50% growth over 2007, according to the press release.

In 2007, VMware's revenues were $1.3 billion. The company had more than 100,000 customers and nearly 14,000 partners, making it one of the fastest-growing public software companies.

That VMware's growth has fallen to less than 50% for the year came as no surprise to some observers. "VMware's guidance shifted from 100% growth per year last year to 50% growth for 2008. Their new guidance says they will be short of that 50%," said Tom Bittman, the chief of research, infrastructure and operations at Gartner Inc. "Gartner had predicted a much steeper slowdown than their guidance had suggested, so this is not a surprise."

But whether VMware management or the economy is to blame for VMware's slowdown is unclear, Bittman said. "It's not that Microsoft or others are taking away a lot of VMware business in 2008, it's more about freezing the market, and the eventual need for VMware to reduce prices – at least at the low-end – to avoid missing out on the greenfield small-medium business opportunity. VMware has a dominant position in large accounts and, for the most part,will retain those accounts and growth in those accounts. Where they will struggle is in small-medium business, where we expect Microsoft to dominate."

"It's also probably true that the economy is impacting VMware," Bittman noted. "We have said that virtualization does well in a good or bad economy, because it saves money, but a good economy favors the bells and whistles of a pricy VMware, and a bad economy favors Microsoft, Citrix, etc."

Let us know what you think about the story; email Bridget Botelho, News Writer.And check out our news blog at Server Virtualization Blog.

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