VMware to Spin Out

EMC plans to offer VMware shares in an IPO early this summer. (See EMC Offers 10% of VMware.)

EMC will float 10 percent of VMware in the form of new VMware shares. There will be no tax implications and the move should not affect EMC earnings, execs said.

CEO Joe Tucci was adamant on a conference call today that there will be no further spinoffs of other EMC properties. EMC will also hold onto the remaining 90 percent of VMware. "We have no intention of spinning out or otherwise divesting this ownership interest," said Tucci. "Long term, we plan on holding onto this precious asset."

Tellingly, Tucci was cagey when asked about the potential for EMC spinoffs at yesterday's RSA conference in San Francisco. During a press conference after the keynote speech by RSA president Art Coviello, Tucci wouldn't answer the question directly, and he warned the audience to take care to listen to his wording very closely. (See Tucci Aims for 'One EMC'.)

EMC's move makes sense. Nine years after VMware's founding, and three years after its acquisition for $635 million by EMC, the virtualization trailblazer has shown dramatic growth, more than doubling its revenues in the last three years.In 2006, for instance, VMware sales grew 83 percent year-over-year to $709 million. In the fourth quarter of 2006, VMware's revenues grew 101 percent year-over-year to $232 million.

Why go IPO now? "The planets aligned... This was the best time to pull the trigger," said Tucci.

EMC execs say they hope to improve VMware's financial momentum and make sure it's very well capitalized. And they say the IPO will also improve VMware's ability to retain top employees with better compensation. Translation: The IPO will help VMware grow without taking more out of EMC's purse.

VMware also wants to increase its independent profile. "[This] further reinforces our commitment to running VMware with an open platform strategy that benefits customers and the broader IT industry," said Diane Greene, president of VMware, in a prepared statement.

EMC reported revenue of $3.21 billion for the quarter, up 19 percent year over year and 14 percent from the previous quarter. (See Tucci Aims for 'One EMC'.) The company execs say they will reveal how much of that revenue came from VMware in their upcoming SEC filings related to the IPO.Analyst response seems largely positive. "We view EMC's decision to monetize some of its VMware position as a net-positive - especially as this has been a topic of much debate from the perspective of unlocking some of Vmware's intrinsic value," wrote Aaron Rakers of AG Edwards in a note to clients this afternoon.

"Clearly EMC sees a real opportunity to get some additional cash based on the popularity of VMware. They also recognize the risk of holding VMware too tightly to themselves," writes analyst Richard L. Ptak of Ptak Noel & Associates, in an email to Byte and Switch. "Virtualization technology will become a commodity technology over the next few years - today EMC has an opportunity to pull some 'value' (read money) out of the popularity of VMware and get some additional money from a rising technology stock market."

Mary Jander, Site Editor, Byte and Switch