EMC Corp.'s plan to sell off 10% of VMware Inc. through an initial public offering (IPO) is an attempt to placate restless shareholders, an analyst said.
"Basically I see this as EMC is really trying to have it both ways here," said Gordon Haff, senior analyst and IT advisor at Illuminata in Nashua, N.H.
"And VMware is clearly a hot property," Haff said.
The industry has been speculating for months that EMC might spin off VMware. EMC stock has gone basically nowhere, and some speculate that stockholders are unhappy.
The stock has barely budged over the past year, closing at $13.35 on Feb. 6, 2006, 25 cents below the $13.60 per share close on Feb. 7, 2007. Shares got a bit of a bump up after the announcement was made yesteday. In early trading Thursday, EMC's stock price was moving steadily upward, rising $1.15 at $14.62 a share.
Public statements from EMC executives confirmed that the company was trying to create some value for its shareholders, but their statements also emphasized that the IPO would help fuel growth for VMware.
Clearly, EMC is making concessions, but it doesn't appear to be ready to give up complete control.
"EMC is trying to thread the needle," Haff said. "They decided to not just spin out VMware and take the money and run. They do want to keep the company in-house and see whether they integrate the company more wholly. They decided they want to get some money out of VMware in the near term to placate the stockholders."
Joe Tucci, EMC chairman, president and CEO, said in a statement that the IPO would "unlock more of VMware's value for EMC shareholders while strengthening its ability to retain and attract the software industry's top talent."
EMC said it has no intentions of spinning off or divesting ownership of VMware. EMC executive vice president and CFO David Goulden said the proceeds from the IPO would help VMware "achieve its full growth potential" and help EMC return "a portion of the original investment in VMware to EMC shareholders."
Haff was doubtful that EMC really needed an IPO to raise capital for VMware's growth. He suggested that EMC already has plenty of capital on hand to fuel VMware's growth.
Business has been booming for VMware, whose annual revenue grew 83% in 2006 to $709 million. Annual revenue of the company now eclipses the $625 million that EMC paid when it bought VMware in January 2004.
"VMware can bring in huge amounts of cash, so I really don't buy any of that," Haff said. "It's essentially a financial play to increase EMC shareholder value."
King said he believed the IPO would also pour capital into research and development at VMware. He said it will help VMware take its virtualization technology beyond servers and into network device virtualization. He said he thinks VMware will also look at virtualizing other platforms besides the X86 servers it concentrates on now.
King praised EMC's handling of VMware since it purchased the company three years ago, especially considering how VMware partners with some of EMC's competitors.
"I think EMC has handled both the acquisition and management of VMware in a remarkably intelligent way," King said. "Very often when a company acquires another company, especially one that does business and partners with some of [the acquiring company's] competitors, it inspires its competitors to head for the exit. If another server vendor or operating system vendor had acquired VMware, I think we'd be looking at a very different kind of landscape for virtualization right now. I'm not sure it would be as rich as it is today."
Let us know what you think about the story; email: Shamus McGillicuddy, News Writer