VMware Ousts CEO Diane Greene

Paul Maritz replaces co-founder Greene as chief of the software maker, whose shares sink on news of the move and a revenue warning

by Aaron Ricadela

VMware ended a long-running battle over its strategic direction on July 8, ousting co-founder and CEO Diane Greene and installing Microsoft veteran Paul Maritz in her place. Investors pounded VMware's once high-flying stock on the shakeup and a warnings on sales growth. Still, Maritz's ascent could be just the tonic investors have sought as the company squares for a fight with the new CEO's former employer and grabs turf in the emerging cloud-computing market.

For months, Wall Street has been pressuring EMC (EMC), which owns most of VMware's (VMW) stock and controls virtually all of its voting rights and board, to replace Greene. She co-founded VMware a decade ago and sold it to storage vendor EMC in 2004, and stayed at the helm after VMware's blockbuster IPO last year. But Wall Street analysts and people close to the company say Greene clashed with EMC management over costs, the company's independence, and its ability to strike deals to distribute its software with EMC competitors like IBM (IBM) and Hewlett-Packard (HPQ). As VMware prepared to lower its 2008 sales estimate for the second time in six months, warning that revenues would fall "modestly below" previous guidance of 50% growth, the board made its move.

By replacing Greene with Maritz, CEO Joseph Tucci of EMC asserts further control over fast-growing VMware and mollifies investors who didn't deem the technically oriented Greene up to the task of leading a company (BusinessWeek.com, 3/13/08) on track for nearly $2 billion in sales this year. "She has fought that [label] ever since they went public," says Jayson Noland, a senior analyst at Robert W. Baird, who rates VMware's stock neutral and reduced his price target on July 8 to $50, from $63. "Can you run a company if you're a little overenthusiastic about your technology? Sure you can. Silicon Valley is full of guys like that," he says. "But Diane never gained traction with buy-side investors."

Future's in Cloud Computing

Investors pummeled VMware stock July 8, slashing the share price by $13, or 24.4%, to 40.19. The shares have fallen 53% this year, and are down nearly 67% from their peak last October. Shares of EMC lost $1.75, or 11.6%, to close at 13.39.

Now, Tucci and Maritz will try to position VMware to benefit from rising demand for so-called cloud computing, a technology that lets companies use the Internet to tap into vast storehouses, or "clouds," of computing power that live outside their walls. "There's one company in my mind that's better able to capitalize on those opportunities" than others, Tucci says in an interview. "The board and I see the VMware opportunity, in one word, as 'immense.'"

The company hopes its future will only get brighter from here. VMware rocketed to success by grabbing the lion's share of the market for virtual machine software that combines the work of several computer servers onto one, letting companies cut hardware, electricity, and labor costs. Sales soared 88% last year as companies snapped up the software. In August 2007, VMware launched the most successful IPO of the year (BusinessWeek, 9/10/07), selling a stake that raised $1.1 billion.