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.
This year has been rougher. In January, VMware shares fell 34% in one day (BusinessWeek.com, 1/29/08) after the company reported a shortfall in sales and issued a disappointing 50% sales-growth target for 2008. Based on that forecast, analysts were expecting VMware to post sales of $2 billion this year, up 51% from 2007. On July 8, the company said this year's sales would miss even that estimate. Tucci says companies have been scrutinizing deals longer as the U.S. economy stagnates, adding that VMware would provide more detail on the outlook when it reports second-quarter earnings July 22.
Microsoft and Other Challenges
Competition has also intensified. In June, Microsoft (MSFT) released competitive software called Hyper-V. Sun Microsystems (JAVA) and Oracle (ORCL) have also announced plans to include virtual machine software with their products.
Maritz says he'll defend against the threat to VMware's current lineup while navigating toward the emerging cloud-computing market. "I'm the last person to underestimate Microsoft," says Maritz, 53, who spent 14 years with the company before departing in 2000. More recently, he headed a cloud-computing startup called Pi, acquired by EMC in February. "On the other hand, there's no magic there. There's no fundamental secret of writing software that they know and no one else knows. I'm not overawed by competing with Microsoft."
VMware is already developing software to help companies access computing power and applications that reside outside their data centers, says Maritz. "We're in the nascent stages of this. This will play out in the next two to five years."
By elevating Maritz, Tucci has placed a confidant in charge of what's arguably EMC's most valuable asset. Maritz had helped lead development and marketing of Windows 95 and other versions of Microsoft's flagship operating system, He has known Tucci since 1994, when Tucci was CEO of now-defunct computer company Wang Laboratories, which had sued Microsoft for patent infringement, the executives said. Microsoft wound up buying a stake in Wang and licensing some of its technology.
Greene Refuses to Stay On
Greene, 53, co-founded VMware in 1998 with her husband, Stanford University professor Mendel Rosenblum, and sold the company to EMC for $635 million in 2004. But she locked horns with her corporate parent over issues ranging from industry partnerships to the cost of VMware's eco-friendly headquarters in Silicon Valley. In the past several months, VMware has hired key technology and marketing executives to assist Greene amid talk that the company was searching for a replacement. VMware didn't make Greene available for comment. Through a spokeswoman, she declined to respond to a direct request for comment.
Tucci says EMC's eight-member board, six of whom are now EMC employees or directors, tried to persuade Greene to stay in a capacity other than CEO, even offering her the chance to design her own job. But she was unwilling to remain onboard with less than her full former powers, Tucci says. "We were unable to get that accomplished, very unfortunately. We wanted that to happen as a board."
Maritz brings new blood to VMware, and will try to right its stumbles. All the while he'll need to navigate what is for many tech companies an even bigger challenge—transitioning to outside management from a team led by the founders.