VMware's Last Hurdle: IPO Lock-Up Expiration (VMW, EMC, INTC, CSCO)

VMware, Inc. (NYSE: VMW) has already taken its hit from the earnings expectations getting high enough that the stock just couldn’t hold up to expectations after a monumental IPO.  There is always a key event that comes 6-months after an IPO, and that is the employee and insider lock-up period.  Once that day hits the insiders and employees of the company can finally unload their stock.  They cannot unload all of it, but you just about always see insider selling on that date and shortly after.

Here is the language from the S-1: "In addition, we have agreed with the underwriters that we will require, as a condition to participating in the exchange offer, participating employees who receive options to purchase our Class A common stock and restricted stock awards of our Class A common stock in the exchange to agree to the foregoing lock-up restrictions, subject to certain exceptions, for a period of 180 days from the date of this prospectus."

We contacted a representative of the company and have confirmed this data, although we would note the possibility at least exists of extensions.  The 180 day lock-up period would put Saturday, February 9, 2008 as the date.  That puts the lock-up date on Monday, February 11, 2008 as the date insiders and employees can finally unload a portion of their stock.  If you read below there does appear that there were clauses that could extend the lock-up date, although after a 100% gain even after the huge pullback it is hard to imagine that underwriters would not honor the original lock-up period dates. 

Frankly, we are surprised that the underwriters didn’t allow an early expiration for at least some of the shares in the lock up period.  We’d also note that as of last look, the short interest in VMware was more than 19 million shares, which is huge when you consider the total IPO (plus overallotment) was only 37.95 million shares.

What you can take to the bank is that many employees will be taking some of their money to the bank.  These are mostly former EMC employees that transferred their EMC stock options into VMware options, and despite the huge sell-off after earnings many of these employee stock options are up well over 100%.  It still appears that some shares and options didn’t get converted into VMware shares for some reason.  We’d also note that certain shares held (but apparently not all) by Intel (NASDAQ: INTC), Cisco Systems (NASDAQ: CSCO) will be unlocking; and depending on the limits, even some of the majority holdings held by EMC Corp. (NYSE: EMC) will be available.  The company has said in the recent past that it wants to hold shares rather than sale, but we have noted how we and others have predicted that EMC will look to begin divesting this either late in 2008 or at some point next year.   

These option conversion and share sales will be staggered as most company plans have restrictions on how much can be sold at any given time, so do not expect a sudden and massive five-fold increase in the public float.  Conversely, the public float is about to get much larger.  Please see below on the actual number of shares that can be available.  These numbers may have changed and there are restrictions on certain numbers here.  Below is the data on certain "shares eligible for future sale":

• ….we have reserved 35,679,411 shares of our Class A common stock issuable upon the exercise of stock option awards,subject to vesting, which were granted in June and July 2007 with anexercise price of $23.00 per share, 365,740 shares of Class A commonstock issuable upon the exercise of stock option awards, subject tovesting, which were granted in July 2007 with an exercise price of$25.00 per share, and 537,676 shares of our Class A common stockissuable upon the vesting of restricted stock units……

• We, our directors and executive officers, EMC, Intel and Ciscohave agreed that, for a period of 180 days from the effective date ofthe IPO, we and they will not, without the prior written consent ofCiti, JPMorgan and Lehman Brothers, offer, sell, contract to sell,pledge or otherwise dispose…..

• Citi, JPMorgan and Lehman Brothers, in their sole discretion, mayrelease any of the securities subject to these lock-up agreements atany time without notice. In addition, we have agreed with theunderwriters that we will require, as a condition to participating inthis Offer, participating employees who receive options to purchase ourClass A common stock and restricted stock awards of our Class A commonstock in this Offer to agree to the foregoing lock-up restrictions,subject to the foregoing exceptions, for a period of 180 days from thedate of this offer to exchange. We may release the securities subjectto these lock-up agreements only with the prior written consent ofCiti, JPMorgan and Lehman Brothers in their sole discretion. Suchrelease may occur at any time and without notice. In addition, bothIntel and Cisco have agreed not to sell their shares of our Class Acommon stock for a period of one year from their respective stockpurchase dates without our consent…..

You can also look on page 161 and beyond on the SEC link here to see the certain percentages that would be applied etc….

Jon C. Ogg
February 8, 2008

Some data herein has been sent to our open email distribution list.  Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.