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EMC tries to appease investors with VMware IPO

Follows our advice

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EMC will set its VMware subsidiary somewhat free via an IPO (initial public offering).

The storage giant will sell close to 10 per cent of VMware through the IPO of newly issued VMware stock. EMC plans to keep the remaining shares of VMware and stressed that it has "no intention of spinning out" the server software maker. The deal could provide a nice boost for EMC shareholders who have watched VMware's sales skyrocket while EMC's share price has remained flat.

"VMware is one of the fastest-growing businesses in the history of the software industry," said EMC CEO Joe Tucci. "We expect the IPO to unlock more of VMware's value for EMC shareholders while also strengthening its ability to retain and attract the software industry's top talent."

In Nov. of 2005, we called for such a move and learned that EMC and VMware executives had debated the idea of an IPO for some time.

During EMC's most recent quarter, VMware again showed stunning growth with a 101 per cent rise in revenue to $232m. VMware's server partitioning software has become very popular with large, corporate customers looking to run a number of applications on a single server. The subsidiary has shown some of the most dramatic growth of any software business over the past few years.

Despite strong software and storage sales, EMC's share price has hovered around the $14 mark for about three years.

EMC expects the IPO to occur during the US summer, while El Reg expects a healthy consulting fee reward once the IPO happens.

Diane Greene and Mendel Rosenblum, two of VMware's founders and a wife and husband team, have remained a constant at the company, which has grown from 300 workers to 3,000 workers since EMC's $630m Jan. of 2004 acquisition. Both founders have strong engineering backgrounds and obvious business skills.

In an interview with us last year, Greene complained that Google had made hiring top talent in Silicon Valley difficult. She now hopes that the IPO will help attract new hires.

EMC plans to reveal more information about the proposed IPO in a regulatory filing.

At first blush, investors appeared to back the deal, sending shares of EMC up 6 per cent in the after-hours market, as of this report.

VMware could use a bit more flexibility and financial muscle as it looks to compete against the likes of Microsoft and XenSource in the coming years. Both rivals have targeted VMware's server virtualization stronghold, while VMware has started to move down market with an assault on the SMB market and plans to expand its desktop virtualization line.

During a conference call today, Greene speculated that the desktop virtualization market could end up being larger than that for servers. ®

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