Ramifications Of A Higher VMware IPO Price (EMC, VMW)

The upcoming and heavily anticipated partial-IPO of EMC Corp.’s (NYSE:EMC) VMware (NYSE:VMW) just saw the stakes of poker go up.  The company has hiked the IPO pricing range for next week from the original $23.00 to $25.00 to a new and higher range of $27.00 to $29.00 for some 33 million shares (plus the 4.95 million overallotment option).  After the partial-IPO, EMC will still own close to 87% of the stock and will have roughly 98% of the votes because of the dual class of shares.  Underwriters in the amended prospectus are Citigroup, JPMorgan, Lehman Brothers, Credit Suisse, Merrill Lynch, and Deutsche Bank. 

If you look at some of the competing interests in a competitor called VirtualIron, it’s probably safe to assume that this higher IPO price will also spawn another public company competitor in virtualization software sooner rather than later. This also adjusted the terms for the employee conversions per the SEC Filing, after we were wondering why some employees had not responded or were holding out to the previous option and restricted stock tender.  The new VWAP price range for employees in the filing shows a $26.00 to $30.00 range for some added leeway.

So far, this is not helping EMC’s stock today, as shares are down more than 2% with a crummy market.  With all of the hype in recent weeks, this price hike should have also been mostly expected.  We’ll still be sending out a playbook to subscribers of our Special Situation Investing Newsletter for EMC and VMware in the hours ahead of the IPO next week.  The stock market getting killed isn’t a help and the timing of this couldn’t have been much worse from EMC but there is also some of a ‘sell the news’ going on.

If you keep reading about Virualization in PC and computer land then you’ll know why the demand is there and why the price got bumped up.  This could now end up with a perceived value of closer to $10 Billion on a fully diluted basis, although keep in mind that this is a very small amount being sold and as of today EMC is not planning on spinning shares off to EMC holders and has not given any plans that it wants to sell more.  Except for the fact that cheaper DRAM and multi-core processors taking virtualization farther and farther into mainstream, nothing else has changed other than the total market opportunity becoming much larger than originally estimated.

Jon C. Ogg
August 9, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.