Vmware's shares soared nearly 80 percent in their stock market debut Tuesday, reflecting a belief the rapidly growing Silicon Valley software...
SAN FRANCISCO — VMware’s shares soared nearly 80 percent in their stock market debut Tuesday, reflecting a belief the rapidly growing Silicon Valley software maker is on the leading edge of a computing trend that will yield huge profits for years to come.
The run-up marked the biggest one-day gain following an initial public offering of stock this year, according to Renaissance Capital’s IPOhome.com. The company’s offering raised $957 million before expenses.
VMware specializes in “virtualization,” which enables a single computer to function like multiple machines. That helps companies spend less on equipment and energy in their data centers.
Rising demand for virtualization software is expected to result in more than $1 billion in sales for VMware this year, but most analysts believe the biggest opportunities still lay ahead.
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In a report released Tuesday, Jefferies analyst Katherine Egbert said VMware seems on the same lucrative trajectory as two of the industry’s biggest success stories, Microsoft and Oracle. Those software makers boast a combined market value of $366 billion 21 years after their IPOs.
VMware’s potential turned its IPO into one of the high-tech industry’s most anticipated since online-search leader Google went public nearly three years ago.
After the company’s investment bankers priced the IPO at $29 late Monday, VMware stock climbed to $51.97 during Tuesday’s late afternoon trading.
The 79 percent increase from the IPO was the best first-day gain since November when Nymex Holding’s shares more than doubled, according to IPOhome.com.
The stock later closed up $22, or 76 percent, at $51.
“This is certainly more than just about anyone expected,” said Gartner analyst Tom Bittman. “Maybe the market is a little giddy.”
The rapid run-up left VMware with a market value of $19 billion. By comparison, Google ended its first day of trading with an 18 percent increase that left it with a market value of $27 billion.
“There are a lot of smiles around here,” Mark Peek, VMware’s chief financial officer, said Tuesday.
That joy was shared by EMC, a data-storage specialist that bought VMware for $602 million in January 2004. EMC remains VMware’s controlling shareholder with an 87 percent stake worth $17 billion.
Despite that windfall, EMC’s shares fell 71 cents to $18.34 Tuesday. EMC’s market value has increased by about $10 billion, or 35 percent, since the company announced its plans in February to spin off a part of VMware.
Joseph Tucci, EMC’s chief executive, will remain VMware’s chairman. The CEO is Diane Greene, who founded VMware 10 years ago and has been running the business ever since.
VMware has more than 20,000 customers, including most of the largest U.S. companies. Its profit more than doubled to $75.3 million during the first half while revenue surged more than 90 percent to $555.5 million.
There still appears to be ample room for industry growth. Research firm IDC estimates the virtualization market will double within the next five years to nearly $12 billion.
The potential of virtualization helped a Seattle company, illumita, pull in $6 million in funding from four high-profile venture-capital outfits last week. The startup was founded last year by four University of Washington computer scientists to commercialize their research into virtualization technology.
Another local company — Renton-based Parallels, a subsidiary of SWsoft — also provides virtualization software both for servers and desktop computers.
Although VMware is dominant, it is facing growing competition from rivals Virtual Iron Software and Xen Source. Bittman believes the pricing pressures posed by those challengers may eventually force VMware to give away some of its products.
The biggest threat of all looms next year when Microsoft plans to introduce a virtualization product code-named “Viridian.” Because its Windows operating system runs so many computers, Microsoft could emerge as the “tour de force” in virtualization, Egbert wrote in her Tuesday report.
But Microsoft is expected to require another year or two to work out the bugs, giving VMware an opportunity to extend its lead.
Both Egbert and Bittman predicted VMware will try to expand through acquisitions, using some of the proceeds from the IPO as well as its high-flying stock.
But EMC could be interested in some of the same companies VMware is eyeing, raising possible conflicts of interest that could prevent VMware from completing deals, Bittman said.
VMware already has earmarked $350 million to pay part of a dividend promised to EMC and $127 million more to buy its Silicon Valley headquarters.
Information about illumita and Parallels is from Seattle Times archives.