EMC's VMware IPO: Good For Channel, Great For VMware

EMC's move to sell a 10 percent stake in VMware via an initial public offering this summer will have a moderate impact on the channel but should give a big lift to the VMware organization, which has outperformed its parent, solution providers and industry observers say.

Amy Rao, CEO of Integrated Archive Systems, a Palo Alto, Calif.-based solution provider, said the IPO will be to raise the value of VMware in the eyes of the channel and the virtualization specialist's customers. "It puts VMware into the limelight," Rao said. "And it will be positive for VMware employees. It will make them happier, which is better for everyone."

The IPO makes sense for VMware, which probably wants to be independent of the EMC name and logo, according to John Murphy, executive vice president of Advanced Systems Group, a Denver solution provider. "VMware will want to do more with other vendors like Sun [Microsystems], IBM and so on," he said. "The autonomy of VMware will be big for the market, and it will help VMware with recruiting because its stock will be outside the juggernaut of EMC."

EMC unveiled a $635 million deal to acquire VMware in December 2003. At the time, solution providers -- including those who worked with VMware via its partnerships with Hewlett-Packard and IBM -- welcomed the move because they expected EMC to pour the kind of resources into VMware that would make it a key IT industry player.

And they weren't disappointed. In January, when EMC reported its fourth-quarter and full-year financial results, the Hopkinton, Mass.-based storage giant said VMware's quarterly sales totaled $232 million, its 31st consecutive quarter of record revenue. That compares with sales of $61 million in third-quarter 2004, the first quarter in which EMC reported VMware's revenue.

During that time, EMC held up its promise to keep VMware's technology and marketing separate so it wouldn't impact VMware's relationships with system vendors, most of which sell VMware software through their own direct and indirect sales channels.

EMC did a good job of keeping the two organizations separate, Advanced Systems' Murphy said. "The level of separation makes it easier for VMware to work with other system vendors," he said.

Tom Mendoza, president of Network Appliance, one of EMC's top storage rivals, praised EMC for running VMware as a separate organization. Still, Mendoza said he's not surprised to see EMC look to an IPO for VMware. EMC bought the company as a way to increase its margins, yet EMC's stock value has risen by only about $1 since the acquisition.

"EMC bought VMware for about $600 million, and now most people feel it makes up about one-third of EMC's market capitalization," Mendoza said. "If VMware is spun off in an IPO, you'll see a different look at EMC's profitability. So it's a delicate situation. VMware hasn't gotten any benefit. There has to be tension [between VMware and EMC]. VMware was a hot company when it got bought."