A Spin-Off that Gives Back

Tech conglomerate EMC Corp. (EMC) first acquired VMware, Inc. (VMW) in 2004. In three short years, the virtualization solutions subsidiary grew from 300 employees to 3,000. In 2007, EMC decided to take VMware public.

EMC management saw the initial public offering of VMWare shares as a way to reward shareholders and employees alike.

The offering will “unlock more of VMware’s value for EMC shareholders,” and help the company “retain and attract the software industry’s top talent,” EMC Chairman, President, and CEO Joe Tucci said in a statement, InfoWorld reported.

The proceeds of the new share sale will “provide VMware with the financial resources it needs to achieve its full growth potential and provide EMC with the potential to return a portion of the original investment in VMware to EMC shareholders, while enabling them to continue to enjoy the vast majority ownership in this strategic and fast-growing business,” David Goulden, executive vice president and chief financial officer of EMC, said at the time.

Shares of VMware were initially priced at $29 per share and publicly listed on August 16, 2007. The stock rocketed to a high of $125.25 in October, but since then have lost nearly two-thirds of their value and are currently trading at $51.72 as of the close yesterday.

A sluggish U.S. economy has certainly taken its toll on this tech stock, but brighter days could be on the horizon.

Earlier this month, Wachovia Securities (WB) analyst Philip Rueppel upgraded VMware to “Outperform” from “Market Perform,” the Associated Press reported. He also raised his earnings and revenue estimates for the company’s first quarter. In a note to clients, Reuppel called the recent pullback in VMware shares “overdone.”

“Recent concerns have led to a steep decline in VMware shares, but we believe near-, medium-, and long-term fundamental drivers remain robust,” Rueppel wrote. “In the long term, we feel VMware shares do not fully reflect the potential from incremental product platforms which leverage long-term industry trends, such as desktop virtualization.”

This is a two-for-one bit of good news. A rosy outlook for VMware means good news for EMC as well, as the primary stakeholder, EMC still holds 86% of VMware stock.

A Spin-Off that Liberates

Philip Morris International Inc. (PM) is the latest Altria Group Inc. (MO) spin-off as part of Altria’s continuing restructuring process. Altria divested its remaining interest in Kraft Foods Inc. (KFT) to shareholders late last year.

On March 28, one share of Philip Morris stock was issued to every Altria shareholder of record as of March 19. Altria distributed 100% of shares and no longer holds a stake in PMI.

The spin-off will free Philip Morris from the strict tobacco regulatory environment and decline in smoking population of the United States and allow it to focus on overseas operations, where sales are still climbing.

As part of the spin-off, the new firm was also able to close its New York headquarters, which is estimated to save $250 million in overhead annually, former Altria and new Philip Morris Chief Executive Officer Louis C. Camilleri said on a conference call, MSNBC reported. The new firm’s headquarters will be in Lausanne, Switzerland where it can better oversee its international operations in 160 different countries.

Shares of Philip Morris International opened at $52.40 on March 31 and since then have dropped 8% to close at $48.20 yesterday.

But Morgan Stanley (MS) analyst David Adelman believes the spin-off is a good long-term strategy.

“There is little evidence that the [previously] existing holding company structure added real operational value (whereas it unequivocally adds cost),” Adelman told investors in a research report.

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