February 7, 2007 1:56 PM PST

EMC to push VMware public, but still keep control

EMC said Wednesday it plans to sell 10 percent of VMware stock this summer in an initial public offering, but added it has no plans to spin off the virtualization company.

"VMware is one of the fastest-growing businesses in the history of the software industry. We expect the IPO to unlock more of VMware's value for EMC shareholders while also strengthening its ability to retain and attract the software industry's top talent," EMC Chief Executive Joe Tucci said in a statement.

VMware's virtualization software lets a single computer run multiple operating systems at the same time, a task useful for consolidating work onto a smaller number of more efficient servers. The company has been moving gradually toward higher-level software for managing this virtual infrastructure.

"VMware is really the star of EMC's software portfolio right now," Technology Business Research analyst Allan Krans said. "With this move, EMC can allow investors to benefit from some of that growth, while retaining the majority of VMware to drive growth internally."

VMware faces a host of competitors--most significantly, the open-source Xen technology that's arriving in Linux and the upcoming "Viridian" project due to arrive by mid-2008 in an update to the upcoming "Longhorn Server" version of Windows.

But VMware has stayed a big step ahead of the pack: its revenue grew 101 percent, to $232 million, in its most recent quarter, which ended December 31. Full-year revenue increased 83 percent to $709 million.

EMC acquired VMware in January 2004 for $625 million, and has operated it as an independent but wholly owned subsidiary. Some company founders, including its former CEO and now President Diane Greene, have remained at VMware.

EMC's move means that VMware's management will experience a diluted version of an earlier ambition. Greene said in a 2003 interview the company was headed toward an IPO, but months later EMC acquired the Palo Alto, Calif.-based company.

The IPO proceeds will go primarily toward investing in VMware's business and secondarily to EMC shareholders, Tucci said in a conference call. "My first concern is to make sure VMware is very well capitalized. After that, we have the opportunity to make sure we get this money back into shareholders' hands. We could do either in form of dividend, which is my first choice, or in form of repurchase of shares," he said.

EMC is holding the IPO to increase visibility into VMware's operations, to make it easier to retain and recruit new employees and to reinforce VMware's independence from EMC, Tucci said. That independence has been important because VMware works closely with IBM, Hewlett-Packard, Sun Microsystems and other direct EMC competitors.

EMC plans to keep its 90 percent stake in VMware. "EMC has no intention of spinning out or otherwise divesting our remaining ownership interest," Tucci said. "Long-term, we plan on holding onto this precious asset."

VMware had about 300 employees when EMC acquired it three years ago, but "today, we're pushing 3,000," Tucci said.

EMC will likely reveal further details in an initial public offering registration statement it plans to file with the Securities and Exchange Commission in late March or early April.

In after-hours trading Wednesday, EMC stock surged 97 cents, or 7 percent, to $14.57.

"It's the smart financial move," said Gabriel Consulting Group analyst Dan Olds. "VMware is very valuable."

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EMC Corp., VMware, Joe Tucci, IPO, virtualization

 

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