EMC's Billion-Dollar IPO

The IT company's plan to sell shares in its VMware subsidiary highlights surging demand for ways to make more efficient use of computing power

By Aaron Ricadela

So much computing power, so little of it used efficiently. That's the plight facing many corporations, their data centers jam-packed with energy-sapping servers that run corporate networks and Web sites. The good news is that a handful of companies, including EMC subsidiary VMware, are practiced at the art of better harnessing all that computing power—and cutting soaring energy bills.

Hoping to tap burgeoning demand for that art—specifically, the software at its base—EMC (EMC) plans to sell shares in VMware in the coming months. About 20,000 companies use VMware's software, which lets programs and data written for a variety of chips and operating systems run on low-cost x86 servers that use processors from Intel (INTC) and Advanced Micro Devices (AMD). That helps companies take different programs spread across a half-dozen or more servers and combine them onto a single machine. The upshot: lower hardware spending and power budgets—top of mind for cost-conscious chief information officers (see BusinessWeek.com, 11/6/06, "Coping with Data Centers in Crisis"). As a result, VMware's sales have skyrocketed, up 83% last year to $709 million, and doubling in the fourth quarter.

Demand could keep rising as EMC mines the swath of servers that don't use VMware's "virtual machine" software and as companies expand its use to wring more uptime out of their data centers amid surging Web traffic. "There's huge market potential for continuing to do what we do today," says EMC Executive Vice-President and Chief Financial Officer David Goulden.

Virtual's Big Potential

EMC wants to exploit companies' appetite for so-called virtualization by selling 10% of VMware's shares in an initial public offering planned for June or July. If successful, the IPO could generate cash for future growth, give EMC 90% ownership in a new company worth perhaps $10 billion, and help EMC boost the price of its own shares by buying back more stock.

Fewer than 10% of servers that use Intel and AMD's x86 chips—the fastest-growing part of the server market—use virtual machines, leaving lots of room for growth, Goulden says. According to market researcher IDC, the global market for virtual-machine software will grow about 33% this year, to $1.28 billion. Just two years ago, the market was worth $560 million. VMware's 2005 market share stood at 55%—and a commanding 73.5% in the x86 market.

Two trends could spark future growth, says IDC analyst John Humphreys. First is VMware's latest release, Infrastructure 3, which takes the ability to move running programs from an overloaded server to an underutilized one without interrupting users' work, and combines it with technology that can reduce servers' downtime and help them respond more quickly to electronic requests. In tandem, the technologies could help IT departments make their data centers more responsive—important as Web workloads affect more parts of computing. "That becomes a major new growth area VMware and other virtualization companies have in front of them," Humphreys says.