EMC to spin off part of VMware in IPO

Three years after being bought by EMC, VMware is going public. EMC announced plans Wednesday to offer 10 percent of its virtualization software subsidiary in an initial public offering (IPO).

The offering will "unlock more of VMware's value for EMC shareholders," and help the company "retain and attract the software industry's top talent," EMC Chairman, President, and CEO Joe Tucci said in a statement.

"We think now is the point where the planets are aligned and this makes sense," Tucci said on a conference call with financial analysts.

When EMC acquired VMware in 2004, it had 300 employees; today it has 3,000, he said. "The growth rate of this company has been phenomenal."

EMC plans to file a registration statement with the U.S. Securities and Exchange Commission in late March or early April for the planned IPO, and the shares could be available for sale some time in the second quarter, said David Goulden, executive vice president and chief financial officer of EMC.

The shares to be put on the market will be new shares, not ones already owned by EMC, Goulden said. The proceeds will "provide VMware with the financial resources it needs to achieve its full growth potential and provide EMC with the potential to return a portion of the original investment in VMware to EMC shareholders, while enabling them to continue to enjoy the vast majority ownership in this strategic and fast-growing business," Goulden said.

Virtualization, which allows a server to better run multiple applications simultaneously, has helped businesses reduce the number of servers they need, reduce their energy consumption and assist in data center disaster recovery efforts, said Diane Greene, who founded VMware in 1998. She is president of VMware and executive vice president of EMC.

"The IPO is a powerful way for us to accelerate our vision of a pervasive, industry standard virtual infrastructure. We see an incredible opportunity ahead of us," Greene said.

More than 10 percent of new x86 server workloads are running on VMware virtualization software, and VMware is used by more than 20,000 customers, Greene said.

Analysts have recently speculated on whether EMC would spin off VMware, said Gordon Haff, principal IT advisor with research firm Illuminata Inc.

"EMC wants to get some of the money while VMware is clearly a hot property," he said. "On the other hand, they clearly want to retain a very large chunk of VMware."

EMC's stock (EMC) has been stuck in the $10 to $15 range for the last three years. The IPO was announced after the New York Stock Exchange closed for the day. In after-hours trading, EMC shares rose $0.91 to $14.55.

Tucci's comments about unlocking VMware's value "might be less politely phrased as 'hopefully getting the shareholders off my butt,'" Haff said.

VMware is an early leader in one of the IT industry's hottest market segments. The company's revenue was up 83 percent in 2006, totalling $709 million, EMC said.

The IPO should generate capital for VMware to invest in innovation, said Allan Krans, an analyst with Technology Business Research. Although VMware is the industry leader in server virtualization software, Microsoft is expected to introduce an update of its Microsoft Virtual Server in the fourth quarter of 2007, which could increase competitive pressure on VMware.