“Partial” Success

In the current IPO market, carve-outs are poised for a revival.

Economically it might be a good time for equity carve-outs, given what could be a difficult year for raising money by peddling businesses to financial buyers, and the higher cost of debt financing for noninvestment-grade companies. But most experts discourage using a market-timing approach for such deals. “It’s very shortsighted to measure the results based on stock price,” says Cardilli.

Piece Plans

For EMC, selling 10 percent of VMware to the public made sense on several fronts, says EMC finance chief David Goulden. In terms of raising capital, the IPO tapped the high market value for virtualization software (which maximizes a company’s investment in computer services by enabling the machines to support multiple applications). VMware’s revenue growth topped 90 percent each quarter last year, compared with 20 percent for EMC. But Goulden also saw value in having separately traded VMware shares available to compensate employees and prospective engineering talent in competitive Silicon Valley. The shares, he notes, directly reflect their contribution at VMware, rather than at the Hopkinton, Massachusetts-based EMC parent.

“Not surprisingly,” says Goulden, “in conjunction with the IPO VMware has been able to hire a number of high-quality engineers, plus a new CFO.” VMware’s finance chief is Mark Peek, a former senior vice president at Amazon.com. No executives of EMC, including Goulden and CEO Joseph Tucci, own stock in VMware.

The IPO also reinforced the perception that VMware software would remain platform-neutral — vital because VMware works with many direct EMC competitors in servers and storage.

As EMC set things up, it still owns 86 percent of VMware and 98 percent of its voting stock, giving it control over the election of directors and approval of corporate transactions. EMC also has an agreement enabling it to use VMware’s source code and IP, even if EMC wants to develop competing products. Not totally unlike eating your cake and having it too.

“Our bankers told us that 10 percent was the minimum required to do the transaction,” Goulden says, stressing that he does not foresee EMC ever selling off VMware entirely.

EMC also received a repayment of $350 million of VMware’s total $800 million in debt to the parent from the IPO’s billion-dollar-plus in proceeds, and is using other amounts from the stock sale to double a previously announced EMC share-buyback commitment, to $2 billion. Further, EMC has closed on $369 million in “seal of approval” investments that Cisco Systems and Intel had made in VMware before the IPO.

For its part, VMware purchased its newly constructed headquarters in Palo Alto, California, for $133 million. VMware also received about $553 million for working capital.

El Paso Pays Down Debt

While increasing the exposure of a fast-growing business to shareholders may motivate carve-outs like EMC’s, the primary goal for El Paso Corp. in selling a stake in its natural-gas pipeline business was to raise cheaper capital for the parent company, says El Paso CFO Mark Leland.


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