VMware Inc. abruptly replaced co-founder Diane Greene as chief executive Tuesday and lowered its sales outlook, triggering alarms that pounded the business software maker's shares to their lowest depths since the company's lucrative public offering 11 months ago. Former Microsoft Corp. executive Paul Maritz took over as VMware's new leader. In the past few months, Maritz had been running a division of VMware's controlling shareholder, data storage specialist EMC Corp. p> VMware didn't provide any explanation for the sudden change in command. The Palo Alto-based company didn't immediately return phone calls. Greene, who was eligible for a $750,000 bonus to supplement her $750,000 salary, had been working under a one-year contract scheduled to expire at the end of this month. She also has had an uneasy working relationship with Hopkinton, Mass.-based EMC and its CEO, Joe Tucci, who chairs VMware's board.

Given those tensions, Greene's departure was interpreted as a sign that VMware isn't faring as well as EMC had hoped in the face of increasing competition and a slowing economy. VMware fed that perception by warning its revenue growth this year will fall shy of the 50 percent increase that management had been targeting.

"This was out of the blue, so people are speculating the second-quarter results weren't up to snuff and this (change) was something that Tucci probably instigated," said Caris & Co. analyst Shebly Seyrafi. VMware is scheduled to release its second-quarter numbers on July 22.

In a prepared statement, Tucci thanked Greene and praised her for developing "a company that is changing the way that people think about computing."

VMware dominates the market for so-called "virtualization" software - products that help corporate data centers lower their expenses on power and equipment by enabling a single computer to function like multiple machines. The "VM" in the company's name stands for "virtual machine."

Greene, 53, and her husband, fellow VMware co-founder Mendel Rosenblum, are widely credited for turning virtualization into a hot concept.

Seyrafi said investors are now are fretting about how VMware will fare without Greene, a soft-spoken sailing aficionado who had been the only CEO in the company's 10-year history.

VMware's shares plummeted $14.25, or 27 percent, to $38.94 in Tuesday afternoon's trading.

At one point, the stock price fell to $36.51 - the lowest it has been since August, when VMware raised more than $1 billion in an initial public offering. That was Silicon Valley's biggest IPO since Internet search leader Google Inc. went public in 2004. Three months after its IPO, VMware shares hit $125.25.

Tuesday's backlash also clipped EMC, whose shares sank to a new 52-week low of $13.18 before rebounding slightly to $13.55, still down $1.49, or 10.5 percent, in Tuesday afternoon trading.

EMC owns an 85 percent stake in VMware, which it bought outright for $602 million in 2004. VMware now has a market value of about $15 billion, down from a peak of nearly $50 billion last October.

Although VMware's earnings are still rising, the profit growth hasn't been quite as impressive as analysts many anticipated because of twin problems: a slowing economy that is causing corporate customers to curtail spending and tougher competition from software kingpins Microsoft Corp. and Oracle Corp. (ORCL), as well as smaller vendors like Citrix Systems Inc. (CTXS)

Those challenges, coupled with VMware's evolution from a relatively small company to a high-profile business with about 5,000 employees worldwide, may have dictated the hiring of a CEO with more operational experience, Seyrafi said.

Maritz spent 14 years at Microsoft, where he helped manage the development of the Windows operating system and several other key software products before leaving in 2000. He later launched a software startup, Pi Corp., that EMC bought this year.

Written By MICHAEL LIEDTKE

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