August 14, 2007
VMWare: Leaving something on the table
It’s starting to look like the good-old, bad-old days in the tech finance business.
Remember when investment banks stood accused of deliberately under-pricing tech IPOs so they could hand big windfall gains to their best institutional investor friends? It was to counter that sort of thing that Google opted for an auction when it went public three years ago this week.
VMWare’s IPO today smacks of an earlier era. An opening day premium of 76 per cent pushed its stock market value up close to $20bn - and all that in spite of its mid-August launch date and the highly unstable state of the financial markets.
The size of that premium suggests that VMWare’s bankers left $725m on the table by pricing the deal lower than they could have done. That is considerably more, as it happens, than EMC paid when it bought all of VMWare three years ago.
Back during the tech bubble, the bankers said they simply had no control over first-day "pops" like this. If traders wanted to chase prices to irrational levels in pursuit of the instant profits on the latest hot stock, that was no reason to price shares at nonsensical levels.
It’s harder to make that argument today. Demand for VMWare was always going to be heavy: it’s not every day a software company whose revenues have reached an annualised $1bn, growing at nearly 100 per cent, makes its appearance on Wall Street. It would be interesting to know how much more EMC would have made had it opted for a Google-style IPO, rather than leaving it to Citi, JP Morgan and Lehman Brothers to find the "right" level at which to sell the shares.
