VMware the bright spot on a gray Wall Street day

VMware Inc.'s initial public offering of stock was a happy side note to a tough day on Wall Street Tuesday.

While the price of stock in VMware (NYSE: VMW) closed at $51 per share, more than 75% above its official offering price of $29, the Dow Jones Industrial Average fell by 207.61 points, or 1.57% of its value, to close at 13,028.92. The debut of VMware, whose software is designed to make computer systems run more efficiently, was overshadowed by weakness among giant retailers and continued worries about the home mortgage market.

Since demand for the stock was so strong that late Tuesday evening, VMware said, the underwriters of the IPO exercised their over-allotment option to purchase, at $29 a share, an additional 4.95 million shares of Class A Common Stock, on top of the 33 million already issued.

The VMware IPO is creating a halo effect on other virtualization software vendors and extends the awareness of virtualization from techies to the investment world.

"I've already gotten several calls from Wall Street analysts this morning saying, 'We'd love to schedule some time for you to come and speak to our institutional investors," said Mike Grandinetti, director of marketing at Virtual Iron Inc., a Lowell, Mass.-based virtualization start-up whose customer base of 750 pales next to VMware's 20,000.

Virtual Iron, funded with $33 million in venture capital, has no imminent plans to go public, according to Grandinetti, but he did say that "any venture-backed technology company always has ambitions to take its company public."

Soon after VMware president Diane Greene pounded the ceremonial gavel at 9:30 a.m. Eastern time to open the New York Stock Exchange, VMware shot to $52 per share. The stock traded in a range of $48 to $55.50 through the day. Shares of EMC Corp., which retains a 90% ownership stake in VMware, followed VMware up in value before falling and closing down 71 cents at $18.34.

But that doesn't bother Ashmeet Sidana, a venture partner with Foundation Capital and a former executive at VMware, who still holds EMC shares from when it acquired VMware in 2004.

"The market has finally begun to really see the potential and the disruptiveness of virtualization," Sidana said. The VMware IPO also disproves the conventional wisdom in venture capital circles for the past five years that enterprise software companies are too risky to invest in, he said.

"The cost of sales was very high, and the sales cycles were very long," Sidana said. "VMware is an example of a successful enterprise software company, and it's going to create more such start-ups."

Virtualization software is designed to make a physical server act like multiple logical servers, improving server utilization by allowing IT managers to efficiently combine numerous computing resources on a single server. Besides VMware and Virtual Iron, other vendors include XenSource Inc. and SWsoft Inc.

And then there's Microsoft Corp.

Microsoft's Windows Server 2008 operating system, coming in February, will include virtualization capabilities. Microsoft's vast Windows customer base gives it a clear advantage, said David Marshall, marketing director of InovaWave Inc., a provider of virtualization optimization software for VMware and others.

"The speed is there, the scalability is there," Marshall said, referring to what he's seen of Server 2008. "[Microsoft] is going to be a factor in the VMware market long term, basically in the Windows shops."

Copyright © 2007 IDG Communications, Inc.

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