A Look At How Much VMware Left On The Table

from the ipo-madness dept

Back during the dot com bubble when startups with no track record were going public on a regular basis with huge first day pops in stock prices, it got many people thinking that such first day jumps were a good sign. In fact, some companies bragged about having the largest first day jump. We haven’t seen much of that lately, but it may be coming back after VMware’s public offering. VMware shares priced at the top of their range at $29/share, but opened this morning at a whopping $52/share. VMware, of course, was supposed to have been one of the potential hot IPOs in the class of 2004, but decided to accept a buyout offer from EMC instead. This turned out to be a great decision, as the company has grown a tremendous amount under EMC, and today’s IPO is for a much more substantial VMware than we would have seen three years ago.

However, since there are plenty of folks who probably weren’t around during the last bubble to learn this lesson, it’s important to remind everyone why first day stock pops like VMware’s are not a good thing, and certainly not something worth bragging about. The difference in price is actually an indication of how much money VMware left on the table. Yes, the company raised nearly a billion dollars by selling shares at $29, but it missed out on the money it could have taken if the shares had been priced closer to the $52 the market has clearly valued its shares at. In other words, it sold all those shares at about 55% of what the market valued the company at. Not such a great thing to brag about now. Of course, there are some advantages to having the first day pop. It does act as a PR mechanism, and it certainly does bode well for VMware if they want to sell more shares to raise more money. However, right now, it certainly looks like the company left approximately $750 million on the table that was snapped up by those trading the stock, rather than the company itself.

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Companies: vmware

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Comments on “A Look At How Much VMware Left On The Table”

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15 Comments
Anonymous Coward says:

Yes, the company raised nearly a billion dollars by selling shares at $29, but it missed out on the money it could have taken if the shares had been priced closer to the $52 the market has clearly valued its shares at. In other words, it sold all those shares at about 55% of what the market valued the company at. Not such a great thing to brag about now.

In other words, they have incompetent management.

An important factor to consider when considering to invest in a company is the competency of its management. This doesn’t bode well for the future value of their stock in my opinion.

Anonymous Coward says:

The headlines read ‘vmware stock surges on IPO’.

That’s BS. The only surging was due to the investment bankers and
EMC, who owned all the shares, simply putting out an initial ask
price of $50+, and the public buying it.

The bankers could’ve priced it at $0.05 and still wouldn’t have sold
anything under the $50+ starting ask price, and as such the whole
‘opening price’ is a complete sham; they knew all along that the
“real” opening price would be $50+.

The $29 price proffered to the press and the SEC was the means to
making their $21 / share profit an immediate reality.

The ‘surge’ is just a way for the investment bankers to get their
money back before anyone else has a chance to do anything with the
stock.

Don’t be fooled by the PR hype — vmware is a good company — but this
IPO has only benefited the investment bankers and EMC. Employees and
potential shareholders were not entered in to the equation; if you
make money, good for you, but it’s not because it was planned that
way.

A VMWare Advocate says:

What does EMC really get?

So, what does EMC actually get? Does Wall street pay EMC $29/share and then resell it for whatever it can get? Does EMC get any of the difference between $29 and $52?

Also, I read recently that EMC only sold 10% of the shares so, it seems like they would be able to use those shares they still have as a source of cash for their other operations. According to analysts at Rochdale, their cost of capital was their main problem. Seems like this should solve that for EMC and make it more competitive.

So should we be buying EMC and avoid VMW?

Anonymous Coward says:

> I was always under the impression that IPOs were primarily
> for the benefit of the founding partners and managers who
> are always issued stocks at the list price and then get
> rich off the pop.

Those people were taken care of when EMC bought vmware back in 2004.

EMC’s only incentive for the IPO was to essentially end up buying vmware for ‘free’, and oh yeah, to keep employees happier because of the sagging EMC stock price. (“Google is hiring” was a mantra)

Bipit says:

Learn then speak

Learn what you’re talking about before posting.

The IPO was priced at $29. That means shares were delivered by the investment banks to buyers at $29 and EMC was paid exactly $29 (less fees of course). Then those buyers were able to sell the shares on the open market, at which time a buying frenzy occurred and the stock shot up to $52. Opening at $52 just means that the first recorded trade was at $52. Investment banks did not pocket the $23 difference nor did EMC or VMWare, in fact it was you and every other person who has money in mutual funds that pocketed the $23 because the accounts that were allocated shares at $29 were likely institutional accounts (usually 70-80% mutual funds, 10% hedge funds, and the remainder retail, ie individuals)

Furthermore, the founders and owners of the company (in this case EMC) are not given any stock during an IPO. Just the opposite in fact, they are selling it in the offering. EMC “bought” their “stock” way back 4 years ago when they purchased VMWare for ~$700 million. So effectively EMC, by growing the company bought VMWare for around $2 – $3 dollars per share 4 years ago and sold for $29 today. They made a lot of money, but most of the money was made already, long before the IPO “pop” that took it from $29 to $52.

As to VMWare leaving money on the table, that is true. But what you have to understand is that while they left $750 on the table today, the positive PR and momentum that an explosive IPO like this will give the stock will likely enable them to do a secondary offering in 6 months for a few billion dollars in additional stock at a very healthy price. The goodwill with investors for “giving” them $750 million is partially offset by the same investors willingness to buy into the next stock offering that the company does. Investment bankers may be many things, but clueless they are not.

IPOs are complicated and its uneducated blathering like yours that only solidify investment bank’s choice to exclude the average investor from the IPO process.

Anonymous Coward says:

Re: Learn then speak

As to VMWare leaving money on the table, that is true. But what you have to understand is that while they left $750 on the table today, the positive PR and momentum that an explosive IPO like this will give the stock will likely enable them to do a secondary offering in 6 months for a few billion dollars in additional stock at a very healthy price.

Only $750? So, at $23/stock that’s around like, what, 32 or 33 stocks? That sure doesn’t seem like very many. How do you even get Wall Street interested in such a small deal?

IPOs are complicated and its uneducated blathering like yours that only solidify investment bank’s choice to exclude the average investor from the IPO process.

So Mike is an uneducated blatherer? You should read some of the stuff he has written on the economics of scarcity. That would probably really set you off.

Anonymous Coward says:

Re: Learn then speak

> Investment banks did not pocket the $23 difference nor did
> EMC or VMWare, in fact it was you and every other person
> who has money in mutual funds that pocketed the $23 because
> the accounts that were allocated shares at $29 were likely
> institutional accounts (usually 70-80% mutual funds, 10%
> hedge funds, and the remainder retail, ie individuals)

Oh, I see. I’d have never guessed that
the investment bankers earmarked all the shares for
mutual funds and other things. Now, I wonder if these
mutual funds are in any way affiliated with those same
investment bankers. Whatcha want to be that they are?

It doesn’t matter *who* pocketed the money — I’m sure
if you follow the money trail, you’ll find they are
all related financially somehow.

For the case of EMC, it doesn’t really matter how much
they pocketed — they just ended up getting vmware for
free, and the employees lost 10x of the value that they
probably would have had if the vmware had not been
purchased.

Bipit says:

my “blathering” comment should have been more directly pointed at those who commented that wall street pocketed the “pop”

as to your glib commentary of me leaving off the “mm” on the $750, i do sincerely apologize if it confused anyone and left them thinking that we were discussing a sub $1000 public flotation.

Anonymous Coward says:

my “blathering” comment should have been more directly pointed at those who commented that wall street pocketed the “pop”

Generally speaking, comments are usually taken to refer to the post they are attached to. Since you chose to attach yours to Mike’s original it of course appeared to refer to Mike. Only one other commenter mentioned a “pop” and that was in a short one sentence comment that hardly seemed to warrant your label of “uneducated blathering”.

as to your glib commentary of me leaving off the “mm” on the $750, i do sincerely apologize if it confused anyone and left them thinking that we were discussing a sub $1000 public flotation.

What have millimeters got to do with it? Now that’s even more confusing. We can only read your writing, not your mind.

Mike says:

Paul Kedrosky has a really good analysis on why the claims that EMC “left $750 Million on the table” are naive, at best. EMC probably could have priced it a bit more aggressively and made a few extra hundred million, but they didn’t lose out on anywhere near the $750M quoted.

Granted, Kedrosky is VC, so he has a vested interest in IPOs continuing to “pop”. He has a valid point, though, that it’s a common mistake not to adjust for risk when doing financial arithmetic.

Anonymous Coward says:

Re: Re:

Kedrosky doesn’t argue in that piece that the stocks weren’t sold at far below market value but rather that investors (himself a venture capitalist) have some kind of right to buy at below market value. He never explains just exactly why they have that right but does go on to call regular the post-IPO investors “idiots” as if though he and his ilk have some god-given right fleece everyone else.

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