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Tech stocks - Thursday, July 10, 2008

Tech:stocker - VMware, Buy The Company, Not The CEO

Seeing VMware's former CEO Diane Greene brings us to simple principle we always follow when investing: buy a company you believe in, not just the CEO and their vision. Unfortunately, there are times when the company and the CEO seem inextricably linked. Charles Schwab and his financial services company come to mind along with John Chambers and Cisco and the great Jack Welch during his reign at GE. But VMware (VMW:NYSE) and Diane Greene? We were surprised that the share price took the hit that it did today.

To Ms. Greene's and her husband Mendel Rosenblum's credit, they launched a great concept at the perfect time. There was definitely a demand for virtualization software back in 1999 and the company grew quickly and went from cash-neutral to profitable in a relatively short amount of time. Then EMC entered the picture.

We never fully understood why the independent and unconventional Ms. Greene decided to sell to EMC (EMC:NYSE). In interviews Ms. Greene claimed she didn't want to deal with Sarbanes-Oxley. That might have satisfied some inquisitive minds but a decent investor relations firm can deal with Sarbanes-Oxley and any other IR issues that may arise.

Still, business continued to grow at VMware and after the company's successful IPO and yet Ms. Greene didn't seem to enjoy her new "partnership" with EMC. Rumors of Ms. Greene traveling to the Boston area without visiting EMC headquarters littered the Internet. Nobody cares if you aren't a best buddy when the profits are rolling in but when things slow down, CEOs rely on people they can trust.

While it is difficult to say whether or not new VMware CEO Paul Maritz has the business acumen and savvy to take the company to the next level, we can assume that he will not have the hands-on approach to developing new products and ideas and Ms. Greene did. This begs the question, was Ms. Greene locked to VMware's value like Jack Welch to GE?

We respect EMC's CEO Joseph Tucci for making the change. When times are tough, you want team players that will work with you to deliver positive results. Ms. Greene demonstrated that she preferred working with her own team versus working with the general manager. Unfortunately, Ms. Greene and the shareholders of VMware and EMC deserved to have this situation handled in a more professional manner. While EMC claims to have made a generous offer to retain Ms. Greene, we have a hard time believing they really tried to retain her services. If they had, the decline in the stock probably wouldn't have been as severe.

So do you buy or hold VMware? We believe their P/E of 68.1, the stock is a little more of a risk than we like. While the company has been attracting best-of-breed executives from Silicon Valley over the last few months, we think it is going to take some for new hires' experience and knowledge to replace Ms. Greene's knowledge and enthusiasm. If you own it, hold it. Otherwise, revisit this one in October when Mr. Maritz has had some time to make some changes to quickly improve the profits.

In the long term, we believe VMware's fate is not linked to Ms. Greene. At the same time we hope Ms. Greene will use her free time to develop another idea. We'll happily be an early-round investor.