VMWare: Family Squabbles

VMware, Inc. (VMW), which is 80% owned by EMC Corporation (EMC), made headlines this week when the company fired their CEO (Diane Green) and lowered their 2008 outlook. While the change in leadership may have caught many by surprise, guidance lower should have been expected given the difficult economic environment and the announcement by Microsoft Corporation (MSFT) that they will be competing in the same space.  ZachStocks has covered VMW in the past as concerns over a high valuation set the stock up as a potential short.  Those who held short positions in the stock this week are likely sitting on solid gains despite a turbulent market.

While CEOs come and go quickly in the competitive technology sector, this particular ousting was interesting as the directive came from none other than the parent company EMC.  Since VMW is basically owned by EMC, the parent company has the authority to basically call the shots.  From reading analyst reports from the likes of Lehman, Wachovia, and Credit Suisse, as well as a timely Barrons article; it appears that there was some division between Green and the CEO of EMC, Joe Tucci.  Green was outspoken in her desire to see VMW become more independent, while EMC needed to keep VMW on their books as it represented the majority of growth for the older, less competitive company.

At this point it looks like the new CEO will be Paul Maritz, who up to this point has been president of EMC’s cloud computing division.  One positive is that EMC has a strong stable of talented and experienced managers to choose from when filling roles within VMW.  There is some speculation that the lowered guidance may have gone a bit too far with the purpose of “cleaning the slate” for the new CEO.  That way he can build his reputation as one who has beat guidance numbers from the first day he took office (never mind the fact that the guidance numbers were artificially low).

While much of the discussion up to this point has been speculation and qualitative in nature, the facts remain that VMW has declined to less than a third of its market cap from late last year.  This is a serious blow to anyone who had a concentrated position in the name (yes, that means EMC too).  Unfortunately, the picture doesn’t look exceptionally bright from this point.  Gaps lower on declining guidance in a bear market aren’t usually met with buying.  Add to that the fact that VMW is still nearly 40 times this year's expected earnings and you have a stock that could continue to trade lower.  While I have peeled off (read bought back) a portion of my short position, I still hold the majority of the shares short expecting a slow drift lower into the end of the year.

Disclosure:  Author has a short position in VMW

Comments

[Ames Tiedeman:]

VMW has been hammered.

2008 Jul 11 04:24 PM

[singo29:]

Time to buy VMW before it gone up. even with growth rate at 40-50%, do you find any other high tech company have this dominated position and such huge room to grow? Look at AMD. Intel. Nvdia. These companies don't have much room to grow now. In short, I agree with the author, what happened last week is just the trick Tucci used to cleaning the slate

2008 Jul 14 08:00 PM