Troubled VMWare's Lowest Close Ever

by: Eric Savitz

Investors continued to shed VMware (NYSE:VMW) shares today in the wake of yesterday’s firing of CEO Diane Greene and a reduction in the company’s 2008 outlook.

The company, which went public August 13, 2007, at $29 a share, immediately went soaring higher, trading as high as $125.25 on an intra-day basis last Halloween. At the time, the perception was that the company had essentially no competition in the burgeoning market for server virtualization software; Microsoft (NASDAQ:MSFT) has since made an aggressive move into the market, as did Citrix Systems (NASDAQ:CTXS).

Several analysts this morning actually asserted that replacing Greene with former Microsoft exec Paul Maritz should be considered a positive development for the company. “It was not a completely unexpected move,” writes Citigroup’s Brent Thill. “We believe Greene did an admirable job taking the company from zero to over $1.3 billion in 2007 revenue, but a different leader seems needed for the next leg in VMW’s story.” EMC CEO Joe Tucci told the Wall Street Journal that Greene lacked the experience to run a company that this year will have close to $2 billion in revenue.

At the, Ashlee Vance theorizes that this was a case of Tucci simply disliking Greene personally. “We suspect that Tucci became less enamored with Greene’s style as VMware’s fortunes rose,” he writes. “He would have very little leverage over the firebrand in Palo Alto. She was responsible for making him look good. She wanted too much control of this VMware gem. She caused too many headaches. People kept thinking maybe she should have the EMC CEO post. Ultimately, she had to go.”

All across the Street, analysts slashed estimates on the company. Lehman’s Israel Hernandez, for instance, dropped his target on the stock to $41, from $75, and gave four reasons for caution on the stock, even at the newly reduced share price: Guidance may be too high given macro weakness; building competitive pressures; additional senior management changes; the impact on employee morale from founder Greene’s departure.

Citi’s Thill, who maintains a Buy rating on the stock, nonetheless cut his target to $52 from $80, and noted that the reduced guidance for 2008 reflects “macro issues which are elongating sales cycles and causing customers to break deals into smaller pieces.” He adds, though, that “the decision to lower guidance may have also been driven by a desire to reset the bar for a new CEO.”

Another key takeaway from the management change is that it appears to make it less likely that EMC Corp. (EMC) will spin off its 86% stake in the company; that no doubt will be disappointing to some EMC holders, who see a spin-off as a way to increase shareholder value. On the other hand, RBC Capital’s Thomas Curlin contends that the issue is not whether EMC wants to spin out its VMW stake, but rather “what they will be forced to do by shareholders” if EMC shares continue to trade in the mid-to-low teens. An alternative for EMC, he says, would be to sell all of VMware to a strategic buyer. “This is a reasonable scenario to consider,” he says, “as we believe an independent VMware will immediately become a strategic target.”

VMware today fell $2.48, or 6.2%, to $37.71, the stock’s lowest closing level as a public company. EMC shares fell 29 cents, or 2.2%, to $13.10. EMC shares have dropped 31% since it took VMW public last summer.

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