VMware Sees Cloudburst Ahead

Jul.17.12 | About: VMware, Inc. (VMW)

Having a super-rich PE is a bit like winning the lottery. It's what you do with your good fortune that matters.

CRN got the scoop on Paul Maritz leaving as head of VMware (VMW), to be replaced by EMC COO Pat Gelsinger, but that looks like just the first of several shoes to drop.

It's the next step in an ongoing reorganization aimed at turning the promise of VMware's high PE into results on the bottom line. The idea is apparently to spin-out the open source assets, from EMC's Greenplum unit and VMware's Cloud Foundry, into a separate company owned by EMC, which could (if successful) be taken public as VMware was.

It makes sense. VMware profit comes from its proprietary virtualization products, not its open source cloud efforts. And the fact that the open source is aimed at filling in gaps within the company's product line isn't lost on programmers who might otherwise be inclined to help. You now have a cleaner open source competitor with Red Hat (RHT) and Rackspace (RAX), alongside hardware and software companies that support enterprise customers moving slowly toward cloud.

In terms of EMC (EMC), this arrangement gives Gelsinger, a former Intel executive long considered the most likely successor to CEO Joe Tucci, a chance to show what he can do as a top man. For Paul Maritz, a former Microsoft (MSFT) executive, you get a chance to see if he really has the kind of open source "game" he's claimed to have. Winner gets the top job.

For shareholders there is opportunity here. It now becomes more clear what you're investing in - hardware , software or cloud (the unnamed spin-off). For EMC shareholders it sets up an exciting succession struggle, and a competition that should be good for everyone. And news of a "brain drain" from the company goes onto the back page, with both Gelsinger and Maritz, now separated, and bidding for talent for clearly-defined jobs.

Traders don't like the moves. They have VMware gapped-down to $81/share from $84/share yesterday, and EMC down almost 50 cents/share.

In the long run, I think those traders are wrong.

Disclosure: I am long MSFT.