Broadcom’s $61bn VMware deal marks chipmaker’s pivot into software sector

San Jose, California — Broadcom said on Thursday it will acquire cloud computing company VMware in a $61bn cash-and-stock deal, the chipmaker’s biggest and boldest bid to diversify its business into enterprise software.

The acquisition is the second-biggest so far this year, trailing only Microsoft’s $68.7bn deal to buy video game maker Activision Blizzard.

The offer of $142.50 cash or 0.252 of a Broadcom share for each VMware stock represents a premium of almost 49% to VMware’s closing share price before talks of the deal were first reported on May 22. Broadcom will also assume $8bn of VMware debt.

The chipmaker’s shares were up almost 3%, while VMware rose 2% in morning trading.

Broadcom CEO Hock Tan, who built his company into one of the world’s biggest chipmakers through acquisitions, is now bringing his deal-making skills to the software sector.

The deal will almost triple Broadcom’s software-related revenue to about 45% of its total sales.

Broadcom will instantly be become as a major software force with the acquisition, Futurum Research analyst Daniel Newman said.

“Having something like VMware ... will have a number of doors open that their current portfolio probably doesn’t open for them,” Newman added.

The deal comes at a time when there is an increased push by the US administration for more competition in all sectors, from agriculture to technology.

“The Federal Trade Commission (FTC) could be concerned Broadcom will use the acquisition to potentially bundle services or raise prices,” said Josh White, assistant professor of finance at Vanderbilt University.

“Ultimately, the FTC will want to understand if this consolidation would impact overall competition and prices, especially in this inflationary environment,” added White, who is also a former financial economist for the Securities and Exchange Commission.

The deal is also a coup for Dell Technologies CEO Michael Dell, who spun VMware out of the computer maker last year.

Michael Dell owns a 40% stake in VMware, while his financial backer Silver Lake, a private equity firm, owns 10%. They have both agreed to vote in favour of the deal.

Broadcom already has commitments for $32bn in debt funding from a consortium of banks.

VMware, which said the offer was unsolicited, will be allowed to solicit offers from rival bidders for 40 days as part of the agreement.

Both the companies also reported quarterly results, with Broadcom forecasting better-than-expected revenue for the third quarter, while VMware suspended its full-year outlook due to the pending acquisition.

Broadcom’s board also authorised a new share buyback programme of as much as $10bn.

Diversification strategy

Broadcom’s pivot into software started after its attempt to buy mobile chip giant Qualcomm was blocked by former US President Donald Trump in 2018 on national security grounds.

Since then Broadcom has taken over business software firm CA Technologies for $18.9bn and bought Symantec Corp’s security division for $10.7bn. It also explored acquiring analytical software company SAS Institute, but didn’t make an offer.

Broadcom went on to slash costs at the acquired businesses, cutting the sales and marketing budgets of the CA and Symantec businesses to 7% of their revenue from about 29%. 

VMware is dominant in the so-called virtualisation software market that enables corporate customers to run multiple applications on their servers.

That business is slowing as companies have found new tools to operate through cloud computing, pushing VMware to seek new offerings, including through a partnership with Amazon.

Broadcom doesn’t have a record of big spending on research & development, said Keith Townsend, analyst at advisory firm CTO Advisor.

This could bode poorly for the launch of new products at VMware, added Townsend, who also had a brief stint with VMware as an enterprise data centre architect.

“As I talk to customers, they’re in desperate need for innovation from companies like VMware.”

Reuters