VMware IPO Debut Dazzles

The much-awaited tech offering gains nearly 76%.
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Updated from 12:27 p.m. EDT

SAN FRANCISCO --

VMware

(VMW) - Get Report

didn't disappoint investors who got their hands on the new issue Tuesday.

The stock got off to a quick high of $55 in its first trading day, and closed at $51 -- well above its initial public offering pricing of $29 late Monday.

Trading volume was heavy at 26.8 million shares, especially considering only 33 million IPO shares debuted Tuesday.

"This is a big day for us," said VMware CFO Mark Peek. "We look it as the start of a new era for VMware and virtualization. We're really excited for all the people at VMware, all our partners in the industry and our customers."

The offering by parent company

EMC

(EMC)

, which is keeping an 89% stake, is considered a recruiting tool for new talent. VMware has a large number of openings for software developers.

"We've already seen an effect, once it was known we'd be going public," Peek added.

"We really think the market segment is in the early stages, and it's the time for us to invest in virtualization and the adjacent platforms," Peek said. "We'll invest and try to hire the very highest-quality caliber people" as the company expands its offerings.

EMC acquired VMware in 2004 for $625 million. It must retain a controlling stake for five years to avoid hitting EMC shareholders with a taxable gain on the acquisition.

In addition to promoting virtualization as a means to server consolidation, "there are a number of areas where our products are applicable," said Karthik Rau, vice president of product development. VMware also markets virtualization products for disaster recovery. "Other customers also use our platform to do desktop management," Rau said.

Demand for shares in the Palo Alto, Calif., developer of virtualization software was oversubscribed on Monday by as much as 25 times the number of shares available, according to MorningNotes.

"They are the largest technology IPO to come public since

Google

(GOOG) - Get Report

," said Scott Sweet, managing director at IPO Boutique. Before adding the overallotment of shares to the deal's 12 underwriters, the listing amounts to $957 million, he added.

VMware's revenue jumped 92% year over year during the two most recent quarters, to $554.1 million, and is on track to break $1 billion for the fiscal year.

Intel

(INTC) - Get Report

and

Cisco

(CSCO) - Get Report

recently

took equity stakes in VMware.

Virtualization enables corporate IT departments to put multiple operating systems and applications on individual servers, and even on desktops, to easily shift computing workloads for better equipment utilization and energy efficiency.

With virtualization, VMware estimates server utilization rates, which are usually as low as 10%, can be boosted to 80%. "That's a highly leverageable value proposition," EMC CFO David Goulden said at an analyst conference in May. "You can pay for virtualization software just through consolidated savings alone."

The company had the market to itself for years, but competitors are coming on strong.

IBM

(IBM) - Get Report

and

Microsoft

(MSFT) - Get Report

now sell virtualization capability and management tools. Microsoft's System Center will ship this month and be added to the price list in October, providing virtualization management tools and support, said Larry Orecklin, general manager of System Center and Virtualization for the software giant.

And smaller companies, such as privately held

Virtual Iron

, which also counts Intel as an investor, could put price pressure on VMware's pricing and future revenue growth.

Although VMware introduced virtualization in 1998, it has managed to sign up only a small fraction of the market because its technology is expensive, said Mike Grandinetti, chief marketing officer for Virtual Iron, based in Lowell, Mass.