VMware rockets as market tumbles

Shares in software company VMware Inc. shot up 75.8 percent in their first day of trading yesterday, defying the overall market slide and notching the biggest opening-day gain of any stock in 2007.

The surge, coming on a day when the Dow Jones Industrial Average fell 1.57 percent, gave a lift to the technology sector and to VMware's majority owner, EMC Corp. of Hopkinton, which spun off 10 percent of the company in a stock offering that raised about $1 billion.

It was the largest initial public offering in technology since Internet search provider Google Inc. went public three years ago.

And investors' appetite for the 33 million shares sold by VMware, a Palo Alto, Calif., company that's become a leader in the emerging technology of "virtualization," was Google-like.

VMware shares, priced at $29 by underwriters Monday, opened at $51 on the New York Stock Exchange yesterday. They traded as high as $55.50 before finishing the day back at $51, leaving the newly public company with a market value of $16.8 billion.

That was more than 40 percent of the $38.4 billion market capitalization of parent EMC, whose shares edged down 71 cents, or 3.3 percent, to $18.34 yesterday. The battered Dow continued its retreat, tumbling 207.61 points to 13,028.92, its lowest level since April.

"VMware's performance was very impressive given what happened in the broader market," said Jim Weiss, president of Concord money management firm Weiss Capital Management, noting that high-tech stocks have weathered the market correction of the past month better than stocks in most other sectors of the economy.

Data storage provider EMC acquired VMware for $635 million in 2004. Sales of its virtualization software, which boosts productivity in corporate data centers by enabling computer servers to run multiple operating systems simultaneously, currently represent less than 10 percent of EMC's overall revenue. Diane Greene, president of VMware, declined to comment on the company's IPO yesterday.

But some industry watchers said the success of VMware's offering is likely to compel financial professionals to put a higher value on EMC, which retains almost 90 percent of the company. Smaller stakes in VMware were sold to Intel Corp. and Cisco Systems Inc.

"Over time, this will be a positive thing for EMC's value," said Brian Babineau, senior analyst for the Enterprise Strategy Group. "Investors will start to value the company as parts of a whole. And when they segregate the VMware part, they'll see EMC is undervalued."

VMware, which employs about 100 engineers at a research and development lab in Cambridge, has shown revenue growth of 80 to 90 percent for the past three years, and net profit margin of between 12 and 15 percent over the same period, said Brian Hamilton, chief executive of Sageworks Inc., a Raleigh, N.C., financial firm.

That has come at a time when many of the high-flying technology companies of the 1990s are experiencing slower growth, and many of the younger high-tech companies that have gone public in a new wave of IPOs this year have yet to turn a profit.

"It's good to see people buying when the market is so volatile," Hamilton said. "It's an indication that investors are getting back to looking at the fundamentals of a business rather than the froth."

Globe staff reporter Hiawatha Bray contributed to this story. Robert Weisman can be reached at weisman@globe.com.