Virtualization leader VMware (NYSE:VMW) has been an exceptional stock for the past three years and the business has grown nicely on the back of server virtualization, system virtualization and management tools. Sometimes, though, I wonder if investors overlook a key part of the VMware story - namely, that EMC (NYSE:EMC) owns 80% or so of the business and can largely do as it pleases with it.
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That is coming home to roost with a vengeance on Tuesday, as rumors have spread widely that EMC is replacing VMware's CEO. While these reports have not been confirmed as of this writing, such a change would be a considerable shake-up for investors and would certainly introduce new risk into the business.
A Swap at the Top?
If a story basically repeated intact by Bloomberg, Barrons, CRN and The Wall Street Journal is true, EMC will be replacing VMware's current CEO Paul Maritz with its Storage Chief Pat Gelsinger. Gelsinger is not only one of EMC's highest-paid employees, but is also responsible for the company's storage products. Gelsinger has been with EMC for about three years, after working for Intel (Nasdaq:INTC) for nearly 30 years, and has been widely seen as a potential CEO in the tech space.
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What is potentially even more interesting is the fate of Paul Maritz. Maritz has done well in his four years at VMware - running the company from about $2 billion in revenue to nearly $4 billion and overseeing a pretty substantial move in the stock (even after seeing a nearly 50% drop at the start of his tenure amidst the housing crash).
While everything is just rumor at this point, Maritz may be in line to become the new vice-chairman at EMC, with an eye towards replacing current EMC CEO Joe Tucci at some point in the not-so-distant future. While Tucci has backed away from his plans to retire in 2012, at 65 years of age he is probably relatively close to the end of his time as CEO.
If True, Where Does VMware Go Now?
Although Gelsinger's experience seems more oriented towards the hardware side of tech, he was in charge of the partnership between EMC and VMware and should be assumed to have ample familiarity with VMware.
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That said, this is an interesting time for VMware in its life cycle. There is a huge debate out there as to whether the server market is still meaningfully under-penetrated by virtualization and whether those who haven't switched over ever will. At the same time, companies like Microsoft (Nasdaq:MSFT), Citrix (Nasdaq:CTXS) and Red Hat (NYSE:RHT) are trying to chew into VMware's market share lead.
One way or another, it's look as though VMware is in the process of transitioning from a heavy reliance on its vSphere business to a more diverse business that includes system management tools, data management, vFabric application stacks and perhaps desktop virtualization as well (another very controversial market). With those moves, large players like IBM (NYSE:IBM), Oracle (Nasdaq:ORCL) and CA (Nasdaq:CA) also become more relevant as competitors.
That's a pretty challenging environment for a new CEO, but also arguably a logical point to make a switch.
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The Bottom Line
Maybe there is no fire at all to this smoke, but these reported leadership transitions do make a certain amount of sense. EMC probably needs to be thinking about identifying its next CEO, and Maritz's performance at VMware would make him an entirely reasonable candidate. Likewise, Gelsinger is probably ready to take on the responsibilities of a CEO role and by moving him to VMware, EMC still gets to benefit from his performance.
As far as the stocks go, EMC continues to look like an undervalued name to hold for the long-term. With the downturn in tech sentiment, worries that VMware will struggle to make its current quarter's numbers (and may guide down), and this rumored CEO change, it is about as cheap as I've seen it in a long time. While VMware is a volatile name that could slide another 10 to 15% on a disappointing quarter, this too is a name very much worth consideration for risk-tolerant investors.
At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.