VMWare's Rising Tide Won't Lift All Boats

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[qi:053] When is a good thing too much of a good thing? It’s surely a question somewhere in the back of the minds of investors in VMWare (VMW). Since the stock went public two weeks ago — at $29 a share, 21% above its initial price of $24 a share — it has rocketed 150% to close Monday at $72 a share.

It’s now worth three times as much as underwriters first thought it was worth.

Did the lead underwriters mess up and leave tens of billions of dollars on the table? I don’t think so. If one were cynical, one would say Citicorp, JP Morgan and Lehman stand to gain more by priming the IPO pipeline with a superstar offering. The market for tech IPO’s now has a very appealing poster child.

Nor does EMC (EMC), VMWare’s proud parent, stand to lose much. EMC received a healthy portion of VMWare’s IPO proceeds. But its net earnings will also gain from the surging stock if it records its 87% stake in VMWare as investment income. As for VMWare itself, what it lost in potential proceeds, it could make up for in free branding.

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Constable Odo

What difference does it make whether the stock is actually worth what investors are paying for it. If you got in a day after the IPO and invested some money and sold it a week or two later, you’re still going to have made some decent money. You get in, then get out. That’s all that really matters. If the stock price collapses in a month or two, that’s the breaks. It won’t be the first time a stock has been overvalued. It has nothing to do with actual worth, only greed. Many investors are willing to take the risk as long as a stock is steadily climbing. One or two bad days of a VMWare stock price drop will have the rats leaving the sinking ship.

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