VMware Sets Much-Anticipated IPO at $29

Rapidly growing software maker VMware Inc. priced its initial public offering at $29 per share Monday, setting the stage for one of Silicon Valley's most anticipated stock market debuts since Google Inc. mesmerized Wall Street three years ago.

Reflecting the intense interest in VMware, the IPO price represented a 21 percent premium above the $24 per share target set before management gave a series of presentations to money managers during the past two weeks.

The so-called road show apparently wowed investors, enabling VMware to boost its offering price despite the recent downturn in the stock market.

After expenses, Monday's sale of 33 million shares raised about $900 million for VMware. The IPO also generated a big payoff for its controlling stockholder, EMC Corp., a data storage specialist that bought the Palo Alto-based VMware for $602 million in January 2004.

Hopkinton, Mass.-based EMC is retaining an 87 percent stake in VMware that's worth $9.5 billion, based on the IPO price. VMware's market value stood at $10.9 billion after the IPO.

VMware's shares -- to be listed on the New York Stock Exchange under the ticker symbol "VMW" -- are likely to rise even higher Tuesday when they are scheduled to begin trading, predicted analyst Paul Bard of Renaissance Capital's

"This is one of the most compelling high-tech companies to go public since Google," Bard said.

Propelled by the online search leader's moneymaking prowess, Google's stock has increased by more than six-fold since its IPO priced at $85 in August 2004.

VMware's products help make corporate data centers operate at a lower cost by enabling a single computer function like multiple machines -- a process known as "virtualization."

The market has been booming, with VMware raking in most of the business.

With 3,000 employees worldwide, VMware is on pace to hit $1 billion in annual revenue for the first time in its 10-year history. The company's sales through the first half of 2007 totaled $555.5 million, nearly doubling from $285.5 million at the same time last year. VMware profit through the first half of this year more than doubled to $75.3 million.

In the year before the EMC acquisition, VMware earned just $4.6 million on revenue of $74.2 million.

VMware's success enticed Silicon Valley heavyweights Intel Corp. and Cisco Systems Inc. to buy a piece of the action.

Santa Clara-based Intel last month agreed to pay $218.5 million, or $23 per share, for 2.5 percent of VMware's common stock. Shortly after that deal was worked out, EMC sold 6 million shares to San Jose-based Cisco for $150 million, or $25 per share.

The hot demand for virtualization software also has attracted the attention of Microsoft Corp., which has indicated that it plans to enter the market. But Bard doubts that threat will hurt VMware during the next year. "They look like they have the market pretty well locked up through 2008," Bard said.

Like a lot of rapidly expanding companies, VMware apparently has had trouble managing its growth. In its IPO papers, VMware disclosed that its independent auditor had found "material weakness" in the company's internal controls as of December 2006, warning the problems could result in a misstatement of its financial results.

As of June 30, VMware said it believed it had fixed the problems by hiring additional accounting workers and increasing management oversight. VMware hired former Inc. executive Mark Peek as its chief financial officer four months ago.

EMC's large stake in VMware also could alienate some investors who feel uncomfortable ceding so much control to another high-tech company whose interest could eventually conflict with VMware's.

Joseph Tucci, EMC's chief executive officer, owns 8.9 million shares of EMC common stock.

VMware's CEO is Diane Greene, who has held the job since she founded the company in 1998. Her husband, Mendel Rosenblum, is VMware's chief scientist.