Virtualization firm VMware has biggest tech stock IPO since Google

In one of the tech sector's most anticipated initial public offerings since Google, shares of VMware of Palo Alto rocketed 76 percent in their first day of trading Tuesday.

After expenses, VMware was expected to take away $957 million, the largest technology stock premiere since Google raised $1.2 billion in 2004.

The one-day gain was the largest for an IPO this year, according to Renaissance Capital's IPOhome.com. Renaissance Capital analyst Paul Bard said VMware is "one of the most compelling high-tech companies to go public since Google."

The IPO spotlights the fast-growing virtualization market, which VMware has largely had to itself until recently. The technology allows computers and servers to perform the work of multiple machines - running several operating systems and applications at the same time - eliminating the need for excess hardware and lowering energy and cooling costs.

Shares in the firm began selling at $52, far above the offering price of $29 per share. The stock peaked at $55.50 before finishing Tuesday at $51.

The company sold 33 million shares, which represents just 10 percent of the available stock. The rest is held mostly by parent company EMC, an information-storage business, which bought VMware in 2004 for $625 million. Based on Tuesday's market performance, the company was valued at a little more than $19 billion.

VMware officials were delighted with the initial performance of the company's stock.

"We think this is just extra energy and visibility for the company and very helpful in attracting even more talented people," said VMware CEO Diane Greene.

The software has won customers with large data centers, which use hundreds to thousands of servers. The company also sells desktop virtualization products that appeal to smaller companies and individual developers.

International Data Corp. is forecasting rapid growth for the category, from $1 billion this year to about $3.4 billion by 2011.

In the first half of this year, VMware recorded revenue of $555 million and is on pace to take in more than $1 billion for the first time. The company's revenue has grown quickly from $219 million in 2004.

Greene said the stock offering should help the company maintain its lead in the field and convince potential buyout targets to come on board with VMware. She said the company continues to push more features into its products, which should keep VMware at the head of the virtualization market.

"We've developed an amazing track record for bringing out, on a regular basis, innovative functionality that moves the bar up again and again," Greene said.

Jefferies & Co. analyst Katherine Egbert said the performance of VMware on its first day, especially during a time of market volatility, showed that investors are bullish.

"It tells you that even in a market where stocks are selling off and investors have a negative view, that VMware stands out as a stock to own," said Egbert.

She said in a follow-up research note to investors that the company, "is on a trajectory that mirrors Microsoft, Oracle and Veritas in the early days."

VMware, founded in 1998, boasts a customer base that includes all of the Fortune 100 companies and more than 840 of the Fortune 1000 companies. Thomas Bittman, an analyst with Gartner Research, said VMware is still only addressing about 6 percent of the market, which gives the company plenty of room to grow.

But he said while VMware has surged ahead in the market, competitors could eat into VMware's lead very soon. XenSource and Virtual Iron Software, which use nonproprietary free source codes, are expected to challenge VMware next year. Microsoft also has a virtualization product that could give VMware a run for its money by late next year, Bittman said.

"We do think VMware deserves the excitement, but they don't have any real competition yet," he said. "Their future is not a given; they have real serious competition coming."

Bittman said EMC's nearly 90 percent ownership could also hinder VMware and concern investors. EMC could be in the position of rejecting aggressive pricing moves by VMware or even competing with its subsidiary for acquisition targets.

Intel and Cisco own minority shares of VMware, totaling about 4 percent between the two companies.

Greene said EMC has treated VMware as an independent subsidiary and she does not see that changing.

Source:www.sfgate.com