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What's Up With VMware and UBS?

By Amy Newman (Send Email)
Posted Dec 3, 2008


The National Bureau of Economic Research said Monday that the United Stares has been in a recession since last December. We, of course, all suspected this for some time, and terms like "slowdown" and "economic downturn" had been euphuisms du jour while we awaited the official word. Virtually Speaking: UBS Global Asset Management is buying up VMware shares while a UBS software analyst slashed the target price and profit forecasts for the virtualization bellwether. Hardly a vote of confidence.

The tech sector had been fairly immune, and some went so far as to say that segment would escape unscathed. This was quite a change from the recession earlier this decade, where tech was at the epicenter, and to some degree the culprit.

It was inevitable that the technology sector would feel the shocks. And indeed lower earnings and layoffs have been announced as stock prices plummet. It's basic economics: If companies aren't generating sales, they aren't bringing in revenue. And if they aren't bringing in revenue they can't afford to buy equipment or software.

In September, as Lehman Brothers employees were cleaning out their offices, VMware was kicking off VMworld. The incongruity was striking, and company spokespeople went to great lengths to explain that virtualization (and thus VMware) not only would be spared from feeling the impact, it could alleviate some of the pain.

However, as noted at the time, "the economy remained the elephant at the show. Whether it was during casual hallway conversation or presentations, Wall Street loomed larger than Silicon Valley on everyone's mind."

In subsequent months, the elephant increased its presence throughout the tech world, and is trumpeting progressively louder.

VMware, like other companies, has had to contend with falling stock prices and increased competition, as it begins to deliver on the expanded vision it outlined back in September.

But just as the additional financial crises rumble below the surface, VMware might have a bigger tornado to fear.

Sandwiched within Monday's Technology Trader article on Barrons, Eric Savitz, offered up some interesting information about UBS and VMware.

According to the article, UBS software analyst Heather Bellini recently cut her rating on VMware to "Sell" from "Neutral," chopping her target price on the stock to $15 from $27. (The stock price was $29 when it first went public in August 2007, then peaked above $100 and is now $10 or so below the IPO price.) Bellini also downgraded profits markedly for both fourth quarter and 2009 noting.

This isn't terribly newsworthy in and of itself. However, what is interesting is the following statement:

As of Oct. 31, the single largest holder of VMW shares other than majority owner EMC is UBS Global Asset Management, which held 16.4 million shares; that position, which represents 30.1% of the company's common shares, was up from 10.1 million shares earlier in the month, according to filings with the SEC.

So the company is largely owned by an investment firm. The same firm that is anticipating earnings to decline. Not entirely a vote of confidence.

Two possibilities come to mind:

  1. They see bargain and value all over it
  2. They are bolstering it up to get it through the coming months.
Of course, a third possibility is that they don't read or follow their own advice.

One thing is certain, however: The tech sector is feeling the pinch and VMware's status is not nearly as golden as it was a year or even six months ago.

Technology is important, but it is capital, whether invested or from revenue drives business development, R&D, market and, in the end, sales. Without capital, enterprises cannot purchase technology, whether hardware or software. New technologies, even those that will save money, are most vulnerable.

Now add to that the fact that the financial services industry is in turmoil, which means these companies aren't buying equipment or much in the way of software. A virtualization strategy may stand a chance if the costs are low and the right equipment is present, which may not work out so well for VMware in the end.

Amy Newman is the managing editor of ServerWatch. She has been covering virtualization market since 2001.

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Tags: recession

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