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VMware At $29 A Share; Analyst Warns Of IPO Drawbacks

Competition from both Microsoft and open source code is now emerging and will get stronger, analysts suggest.

VMware spokesmen said late Monday that the company plans to go to market Tuesday with a $29-per-share price, positioning its IPO at the high end of where observers had pegged its likely entry as a publicly traded company.

The high-end pricing means company officials believe there's a huge reservoir of interest among investors in its virtualization software products, including its ESX Server hypervisor and Virtual Center management software. "I had heard it would be priced at $24," said Thomas Bittman, the Gartner analyst following VMware's march toward an IPO, when he learned of the pricing at the end of the day Monday.

For those who want to invest, even at the price, Bittman noted that VMware is a peculiar IPO. Its parent company, storage vendor EMC, is only offering 12.5% of VMware and is retaining 98% of the voting power. That means VMware's management and board of directors will need to run the gauntlet of EMC executive approvals before acting on such key moves as acquisitions.

Data center automation startup Opsware would have been a natural acquisition for VMware, but it's been taken by HP, he noted, in a deal announced June 2.

Bittman warned investors that VMware has had the virtualization field to itself for nearly six years. Competition from both Microsoft and open source code is now emerging and will get stronger as VMware launches its plan to sell 33 million shares on the New York Stock Exchange. It will trade under the symbol VMW.

"VMware has doubled its business every year for the past six years," and its revenue will cross the $1 billion mark later this year, Bittman said. The virtualization market remains young and only 5% tapped, even though nearly all members of the Fortune 1,000 have virtualization pilots or small virtualization implementations already under way in their data centers.

Despite the low market penetration, Bittman said it may be erroneous to believe that VMware can continue its annual doubling of revenue indefinitely.

Microsoft is planning to launch a hypervisor product, Veridian, with beta code available later this year, which will resemble VMware's ESX Server. Microsoft conceded earlier this year that one of the most sought-after features, the ability to move running virtual machines from one physical server to another, won't be available until the second version of Veridian is launched at a future, unspecified date.

Another competitor, XenSource, said Monday that it has launched the fourth version of its XenEnterprise hypervisor, based on the open source code Xen hypervisor. XenSource is adding management tools and live migration features to XenEnterprise v4 in a bid to match VMware's product offering.

Virtual Iron makes a commercial virtualization server and virtual machine management products based on open source Xen.

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