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VMware to pony up $400m for buybacks

EMC to maintain 80% stake

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In filings with the Securities and Exchange Commission, virtualization juggernaut VMware said its board of directors had authorized a stock repurchase plan to allow the company to go out on Wall Street and buy back up to $400m in its class A shares between now and the end of 2011.

VMware says in an 8K filing that the share repurchases will help offset the dilution of its stock as it provides equity-based compensation to its employees, which is reasonable provided the share price of VMware is not so high that it would be cheaper just to give employees cash and bonuses. (Stock awards are great as compensation so long as the company stock is growing and will continue to do so; they are not so much fun when a company's stock tanks and your options are underwater.)

Stock buybacks are also a means of helping companies boost earnings per share if they hold onto more of the stock than they let back out the door again as compensation.

VMware has nearly 406 million shares, with about 72 million floated to the public and the remainder held by parent company, EMC. Its market capitalization is $20.7bn, so at current prices, $400m doesn't buyback that many shares - about 7.8 million shares at VMware's current $51.40 per share price. Over the next two years, that will be on the order of about a seven cent per share boost in earnings if VMware burns all the cash, or somewhere just shy of a penny per quarter.

This is not exactly financial engineering on the scale of IBM. VMware would have to spend a lot more money to really push up EPS numbers, and quite frankly, it has better things to do with its cash, such as making acquisitions.

In a separate 8K filing, EMC said that it would also make purchases of VMware's class A stock on the open market to maintain its 80 per cent stake in VMware.

"The public offering of VMware's stock has enabled EMC to expose the value of VMware to the public markets, attract and retain the best talent in the industry and continually reinforce VMware's commitment to an open platform strategy," explained David Goulden, EMC's chief financial officer, in a statement.

"We believe maintaining EMC's ownership level in VMware at approximately 80 per cent allows us to continue to achieve the above objectives while also maximizing value for EMC shareholders over the long term."

Don't get me started on how EMC shareholders already owned all of VMware before it was taken public and how the public float of VMware was like a scheme out of The Producers. Wall Street surely doesn't want to hear it. ®

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