Microsoft Tries To Catch VMWare (VMW, MSFT)

Virtualization is the next big thing and Microsoft (MSFT) does not want to leave it to VMWare (VMW). 24/7 Wall St. has written a great deal about VMW, and it may be that the stock is getting fully valued, especially if MSFT is moving into the market.

Redmond has just released Systems Center Virtual Machine Manager 2007, and the new product may give VMW some real fits. According to CNET "Microsoft’s main weapon against VMware is expected to be a piece of software, code-named Viridian, that will be included as a feature of its next generation of Windows Server software. Viridian will act as a "hypervisor" or extra layer that sits between the hardware and the operating system."

MSFT also has the built-in advantage of size. Estimates are that "virtualization-enabled Windows Servers to surpass 10 million units by 2010." That gives the world’s largest software company a foot in the enterprise server door that no other firm can match.

Microsoft launched it new product with a challenge: "We think the impact of virtualization is much broader than how VMware is defining it," said David Greschler, a Microsoft director of integrated virtualization strategy.  We noted many companies would be making their news ahead of and at the VMWORLD Conference in San Francisco next week, and this seems to be along that assault.

VMW may already be vulnerable on a valuation basis. The shares trade at almost $67. That gives the company a 28x sales to market value. Microsoft trades at 5x.

Granted VMWare has better growth prospects, but Microsoft could step in the way of some of those.

Douglas A. McIntyre