VMware Beefs Up Its Bench

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Wall Street analysts say Greene could use additional management support to complement her strengths in such areas as developing products and striking industry partnerships. A big need, they say, is executives who can better sell VMware's story to investors. Those concerns have intensified since VMware issued its fourth-quarter results, says Brent Bracelin, a vice-president and senior research analyst at Pacific Crest Securities. "A lot of the questions about competition and leadership are the result of a slowdown in their business," Bracelin says. "People are saying, 'Is there someone better suited to that [CEO] role given the size of the company?'" Bracelin has an outperform rating on the shares and expects them to recover to $85. To get there, he says: "What we need to see from Diane and the company is solid execution."

Greene and her team will be tested later this year, when Microsoft plans to begin including virtualization software comparable to VMware's with its Windows Server operating system. On Mar. 12, Microsoft acquired virtualization software developer Kidaro, less than two months after another acquisition in the same arena (BusinessWeek.com, 1/22/08). In November, Oracle introduced software that competes with VMware (BusinessWeek.com, 11/15/07), and in February, Sun Microsystems (JAVA) made an acquisition in keeping with its plans to jump into the virtualization market.

Holding the Line

To be sure, VMware is still a solid performer in the marketplace. It claims 85% of the market for virtualization software on low-cost servers that use chips from Intel (INTC) and Advanced Micro Devices (AMD), helping CIOs eke more performance out of underutilized computers at a time when IT hardware budgets are under pressure. VMware recently won large contracts with EDS (EDS), Ford Motor (F), and Harley-Davidson (HOG). A Feb. 26 deal with Dell (DELL) means VMware's software will come preinstalled on many Dell servers starting in April; VMware has similar deals with Hewlett-Packard (HPQ) and IBM (IBM). And VMware is eyeing future growth from virtualization software for desktop PCs, acquiring software maker Thinstall on Jan. 15 to address this market.

Greene, who turns 53 in June, is hardly close to retirement. Her one-year employment contract expires on July 26, but is subject to one-year renewals unless she or the board decide otherwise. A VMware spokeswoman says Greene has led the company for the past decade and is unlikely to depart anytime soon.

VMware's rapid growth—revenues soared by 88% in 2007, to $1.33 billion—is enabling it to attract senior talent from around the industry. Recruiters also say it's easier for VMware to attract talent now that its stock has declined, enabling the company to issue more attractively priced stock options.

"VMware is a really hot commodity in the market right now," says Korn/Ferry recruiter Milan. To ensure VMware retains that status, Greene and her management team—with the help of a beefed-up bench—will need to pull off another contrarian move and buck the economic and competitive forces conspiring against them.

Ricadela is a writer for BusinessWeek.com in Silicon Valley.