Investors Eagerly Await VMware IPO
BY SARA LEPRO 08.10.07, 1:44 PM ET
NEW YORK - The hype surrounding next week's highly anticipated initial public offering of virtualization software company VMware is warranted, according to analyst sentiment.
"Certainly, from a technological standpoint, this is the stock that most of the investing world has been waiting for," said David Menlow, president of market research firm IPOFinancial.com. "It's going to be met with an incredibly strong level of investor support."
The company on Thursday raised the IPO's expected price range to between $27 and $29 per share, affirming the growing interest in the stock. The Palo Alto, Calif.-based company, a unit of data storage provider EMC Corp., originally planned to offer 33 million Class A shares between $23 and $25 each.
Assuming an offering price of $28, VMware expects to raise about $866.2 million, making it one of the largest IPO deals so far this year.
The deal highlights the increasing importance and interest in virtualization software. Originally designed for use in large enterprises, the software essentially enables the running of several applications and several operating systems on one server. By using fewer servers, a company can reduce energy requirements and gain better manageability of the data in the system.
The software has become more applicable and available to individual users as of late. For example, it can enable users of Apple's Mac OS X operating system to switch between that platform and Microsoft's Windows, giving Mac users access to programs that only work on Windows.
The IPO has become high-profile in part because of the investment it has already attracted. At the beginning of July, Intel Capital, the investment arm of chip maker Intel Corp., made a $218.5 million investment in VMware. After the IPO, Intel will own roughly 2.5 percent of VMware's outstanding shares. An Intel executive will join VMware's board of directors.
"That's not an investment you usually see coming from such a prominent name around an offering," Menlow said. "This is an incredible statement of strength and really just confirms the pedigree of the company."
After Intel's investment, fellow technology giant Cisco Systems Inc., which makes routers and switches that direct data over computer networks, a few weeks later purchased a $150 million, or 1.6 percent, stake in VMware.
EMC will hold about 87 percent of the outstanding common stock following the offering, and therefore will maintain control of the company.
Despite its connection to well-known players in the tech market, VMware faces the challenge of increasing competition.
"Competition will definitely be an issue, but to what extent I'm reluctant to say," said equity analyst J. Hingorani, who covers EMC at Standard & Poor's. But Hingorani is quick to add that VMware is probably the furthest ahead of its competitors, which include Virtual Iron Software and XenSource.
VMware's IPO could spark additional IPOs in the virtualization market. John Thibault, president and chief executive of Lowell, Mass.-based Virtual Iron, said an initial public offering is something the company will have to consider by the end of next year, or beginning of 2009.
VMware plans to use the net proceeds from the IPO to repay debt owed to its parent, to purchase its headquarters from EMC and for working capital and other general corporate purposes.
For the three months ended March 31, VMware reported earnings of $41.1 million, double what it reported the same period a year earlier.
VMware plans to list its shares on the New York Stock Exchange under the symbol "VMW."
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