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VMware's Stock Rises 76 Percent in Debut

VMware Inc.'s shares soared by 76 percent in their stock market debut Tuesday, reflecting a belief that the software maker is on the leading edge of a trend.

VMware Inc.'s shares soared by 76 percent in their stock market debut Tuesday, reflecting a belief that the rapidly growing software maker is on the leading edge of a computing trend that will yield huge profits for years to come.

The run-up marked the biggest one-day gain following an initial public offering of stock so far this year, according to Renaissance Capital's IPOhome.com. The offering by the Palo Alto-based company raised $957 million before expenses.

VMware specializes in a process known as "virtualization." It enables a single computer to function like multiple machines, enabling companies to spend less on equipment and energy in their data centers.

The rising demand for virtualization software is expected to generate more than $1 billion in sales for VMware this year, but most analysts believe the biggest moneymaking opportunities still lay ahead.

In a report released Tuesday, Jefferies & Co. analyst Katherine Egbert said VMware appears to be traveling on the same lucrative trajectory as two of the industry's biggest success stories, Microsoft Corp. and Oracle Corp. Those software makers boast a combined market value of $364 billion 21 years after their IPOs.

VMware's potential turned its IPO into one of the high-tech industry's most anticipated since online search leader Google Inc. went public nearly three years ago.

After the company's investment bankers priced the IPO at $29 late Monday, VMware's finished Tuesday's regular trading at $51. The increase from the IPO price was the best first-day gain since last December when the shares of a smaller high-tech company, Isilon Systems Inc., rose by 78 percent, according to IPOhome.com.

"This is certainly more than just about anyone expected," said Gartner Inc. analyst Tom Bittman. "Maybe the market is a little giddy."

As an example of how a once-sizzling stock can fizzle, Isilon's shares have fallen 28 percent below its IPO price of $13.

The rapid run-up in VMware's stock left the company with a market value of $19 billion. By comparison, Google ended its first day of trading with a 18 percent increase that left it with a market value of $27 billion.

"There are a lot of smiles around here," Mark Peek, VMware's chief financial officer, said in an interview Tuesday.

That joy also was shared by EMC Corp., a data storage specialist that bought VMware for $602 million in January 2004. The Hopkinton, Mass.-based company remains VMware's controlling shareholder with an 87 percent stake currently worth nearly $17 billion.

Despite that windfall, EMC's shares fell 71 cents to $18.34 Tuesday. EMC's market value has increased by about $10 billion, or 35 percent, since the company announced its plans in early February to spin off a part of VMware.

Joseph Tucci, EMC's chief executive officer, will serve as VMware's chairman. VMware's CEO is Diane Greene, who founded VMware 10 years ago and has been running the business ever since.

VMware has 3,000 employees and more than 20,000 customers, including most of the largest U.S. companies. The company's profit more than doubled to $75.3 million during the first half of this year while revenue surged more than 90 percent to $555.5 million.

There still appears to be plenty ample room for growth. Research firm IDC estimates the virtualization market will double within the next five years to nearly $12 billion.

Although VMware has dominated the field so far, it is facing growing competition from rivals like Virtual Iron Software and Xen Source. Bittman believes the pricing pressures posed by those challengers may eventually force VMware to give away some of its products.

The biggest threat of all looms next year when Microsoft plans to introduce a virtualization product code-named "Viridian." Because its Windows operating system already runs so many computers, Microsoft could still emerge as the "tour de force" in virtualization, Egbert wrote in her Tuesday report.

But Microsoft is expected to require another year or two to work out all the bugs in its virtualization software, giving VMware an opportunity to extend its lead.

Both Egbert and Bittman predicted that VMware will try to expand through acquisitions, using some of the proceeds from the IPO as well as its high-flying stock. But EMC could be interested in some of the same companies that VMware is eyeing, raising possible conflicts of interest that could prevent VMware from completing deals, Bittman said.

VMware already has earmarked $350 million to pay part of a dividend promised to EMC and another $127 million to buy its Silicon Valley headquarters.

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