The Other Side of VMware's IPO

EMC's domination. Clearly, EMC is the chief beneficiary of this public offering. EMC continues to hold about 90 percent of VMware's shares. And isn't anything VMware does likely to be influenced by its chief stakeholder? At the very least, EMC's dominance could edge out other voices. VMware management put it best to prospective shareholders in a recent SEC filing: "As long as EMC controls us, your ability to influence matters requiring stockholder approval will be limited."

Tough corners. Another aspect of EMC's control pertains to how VMware operates with partners and customers. There may be times when EMC competes with VMware or its partners. In its prospectus, VMware management states: "Our existing and potential partner relationships may be affected by our relationship with EMC. We partner with a number of companies that compete with EMC in certain markets in which EMC participates. EMCs majority ownership in us might affect our ability to effectively partner with these companies. These companies may favor our competitors because of our relationship with EMC."

Joe Tucci. The CEO of EMC isn't the problem, it's the fact that he's got too much power. "[W]e view unfavorably the combined positions held by the chairman and chief executive officer," writes by Jawahar Hingorani of Standard & Poor's today. "Also, shareholders do not have cumulative voting rights, and the board can increase or decrease its size and amend bylaws without shareholder approval."

Pressure on VMware. VMware's growing fast. So fast, in fact, that outside accountants think it hasn't kept up with the books. In an SEC filing this week, VMware reveals that it had to hire additional accountants in response to an alleged "material weakness in the design and operation of our internal controls as of December 31, 2006, related to the capitalization of software costs." That could mean a financial misstatement if the measures in place don't fix the problem. What else has VMware sacrificed in its drive to market?

EMC Corp. (NYSE: EMC)

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VMware Inc.