EMC & VMware ‘Final’ Exchange Ratios; Industry Leaders Invested in a Competitor (EMC, VMW, INTC, SAP, GS)

July 26, 2007 by Douglas A. McIntyre
FILING TERMS & BRIEF BACKGROUNDER

In an SEC Filing, you can see the ‘final amended’ exchange terms foremployees of EMC switching into new VMWare shares in their options andstock grant plans.  The final two full trading days of the Offer (unlessthe Offer is extended) will be August 2, 2007 and August 3, 2007.  Thatbeing said, this deal could still come as soon as the following week orso. 

 
This new exchange rate looks similar to the last VMWare exchange datawe gave based on shares as the table has widened out a stock pricingrange on VMWare of $22 to $26 and the various exchange levels for EMCare in a $15 to $20 range.  Maybe EMC thinks that can’t go above $20?Don’t panic, it’s just a reference point for them.
   As we previously noted,Intel (NASDAQ:INTC) did make a large VMWare investment recently to thetune of $218 million for a 2.5% stake post-IPO, so it isn’t like Intelis going to be out trying to shoot itself in the foot.  If that was theactual number, you would have derived a value of more than $8.7 Billionif all things were equal.
 
COMPETITION……OR MERE NOISE?
 
But Intel and several others have a stake in a competitor toVMware in holding stakes in a company called VirtualIron.  This companyhas recently surfaced in web searches.  There it was, on the sponsoredsearch results in Yahoo! under the search term "VMWARE" was an ad forVirtualIron listed as "The VMware Alternative" with free virtualizationsoftware available for download.  This did not appear under the samesearch in Google, or at least not on the first page. 
 
After EMC’s highly successful and rewarding acquisition of VMwareyou can bet there will always be competitors. If you look at the backers of VirtualIron,you will see Highland Capital Partners, Matrix partners, Goldman Sachs(NYSE:GS), Intel’s (NASDAQ:INTC) VC arm Intel Capital, and SAP AG’s(NYSE:SAP) SAP Ventures all listed as investors in the company.Computer Business Review has an articlenoting that this was a ‘total’ series C capital raise of only $8.5million in 2005, so this isn’t anywhere near the size nor thecommitment compared to the VMware investment.
 

THE LATEST VMWARE DATA

Here were VMWare’s latest numbers shown inside theEMC earnings release:  VMware grew sales 89% year-over-year inside ofEMC Corp. (NYSE:EMC) to $298 million during the second quarter. Duringthe quarter, the virtualization company broadened its product portfoliowith new releases of its virtual desktop software and continued toexpand its network of technology and distribution partners. 

The partial IPO of VMware is expected to be completed this summer,according to EMC’s latest press release.  Based upon my discussionswith EMC employees this is still an August target ahead of its VMWareconference in San Francisco.  If they are smart they will still target’early August’ because their investor audience is going to besignificantly lower as we get into the week ahead of Labor Day. 

   As we reach the immediate days ahead of the actual IPO, we’ll be sending a play book ahead of the EMC partial spin-out to our subscribers.It goes without saying that this IPO will be one of the most watchedevents in technology IPO’s for 2007, at least if the current coverageand rate of emails I receive with inquiries on this is any barometer.

   Jon C. Ogg
   July 26, 2007

   Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.