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.

Filed Under: first day pop, ipos
Companies: vmware

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  1. identicon
    Bipit, 14 Aug 2007 @ 8:41pm

    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.

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