Volatility shakes up investors
With much at stake, EMC hopes its IPO for VMware soars amid uncertain skies
The most hotly anticipated technology stock offering in several years is about to collide with one of the most volatile stock markets of the decade, and the stakes are high for Hopkinton's EMC Corp.
Data storage titan EMC's decision to sell 10 percent of its Palo Alto, Calif., software unit VMware Inc. to investors in an initial public offering has created a buzz from Wall Street to Silicon Valley not seen since the weeks before the August 2004 market debut of Google Inc. VMware is expected to price its shares next week.
But the wild stock market swings of the past few weeks have created unforeseen risks for the offering, once thought to be a sure thing for the company at a time when the number of IPOs has been climbing. Yesterday, the Dow Jones industrial average plunged 387.18 points, or 2.83 percent, to 13,270.68, its second-worst day of the year.
Market watchers think a successful IPO for VMware could boost the market value of EMC, which will retain majority ownership and control the newly public company through a class of super-voting shares. Conversely, if the IPO fizzles, the reversal could pull down EMC, whose stock has moved up in anticipation of the offering since VMware filed its IPO registration statement in April.
"It's riskier," said M. Benjamin Howe, chief executive at Boston investment bank America's Growth Capital. "Because if the day they come out is one of those down days, they're more susceptible to the large institutional buyers knocking down the IPO price."
While he expects strong demand for VMware shares, Howe said EMC's ability to price them successfully hinges on a variety of factors. Among them is effectively managing expectations in the polite tug of war between EMC executives, who want to price VMware shares as high as possible, and big-block investors such as mutual funds and pension funds that want to buy them as cheaply as they can.
Key players in that scenario will be the IPO underwriters, led by Citigroup Inc., JPMorgan Chase & Co., and Lehman Brothers Holdings Inc. In addition to EMC, whose shares fell 66 cents, or 3.6 percent, to $17.74 yesterday on the New York Stock Exchange, other technology companies have a lot riding on the VMware offering. Intel Corp. and Cisco Systems Inc. have both invested in VMware.
Earlier yesterday, in a signal that institutional investors have been clamoring for shares in the IPO during this month's road show by VMware executives, the company boosted its projected price range for the offering more than 15 percent. The company said in a Securities and Exchange Commission filing it now expects to sell 33 million shares at $27 to $29 each, raising nearly $1.1 billion.
In its previous SEC filing on Aug. 3, an amendment to its prospectus for the stock sale, VMware projected a pricing range of $23 to $25 a share, which would have raised $825 million.
VMware, which EMC acquired for $635 million in 2004, is a market leader in the rapidly growing field of virtualization technology. Its software enables the server computers used by businesses and other enterprises to run multiple operating systems, in effect transforming themselves into "virtual servers" that let organizations add computing power at low cost. The technology also gives EMC the opening to sell more of its high-end storage equipment to company data centers.
Among investors and high-tech engineers in California's Silicon Valley, the VMware stock offering has generated "a significant buzz," said Brian Babineau, a senior analyst in Palo Alto for the Enterprise Strategy Group research firm. "It's like the Google phenomenon. Everyone's looking for jobs at VMware."
While conceding the stock market gyrations present a wild card, Babineau said VMware's technology and fast growth should ultimately overcome any investor qualms. A strong debut, he said, would convince investors that EMC itself is undervalued based on its control of the emerging technology. "This is a risky time because every company is subject to trends in the capital markets and you don't know what the immediate reaction's going to be," Babineau said. "It would be bad if they came out on a really down day. But over an extended period, their growth rate and their standing in the market will trump any short-term volatility."
Despite the volatility, 2007 has been shaping up as the strongest year for IPOs since the dot-com bubble burst early in the decade. There have been 147 offerings in the United States this year as of last Friday, a 25 percent increase from 117 a year ago, according to America's Growth Capital. Within the high-tech industry, there have been 40 offerings, an 82 percent increase from 20 last year.
But the stock market retreat of the past few weeks has hurt the performance of companies that have gone public. "This year's IPOs overall are up 1 percent," Howe said. "That's essentially flat. Technology IPOs are up 5 percent, which is a little better than the average."
Robert Weisman can be reached at weisman@globe.com. 