Broadcom will pay $138.23 per share for VMware in the cash-and-stock deal, more than 40% above VMware’s stock price before reports of the deal.
The deal, which sources earlier this week had said was likely, would give chipmaker and software giant Broadcom a marquee asset for its drive in recent years to become more of a software company, following its $18.9 billion acquisition of software company CA Technologies in 2018 and its $10.7 billion purchase of a security unit of Symantec in 2019. Those deals came amid the failure of its big bids to buy Qualcomm Inc. for $117 billion in 2017 and SAS Institute last year.
Broadcom sells chips for a wide variety of devices from the iPhone to servers and personal computers to industrial equipment. But a large chunk of its growth lately has come from data centers, so VMware and other software assets help it double down on that market.
Broadcom cast the deal as a bid for the company to become a leader in the broad enterprise and cloud computing markets, with both hardware and software to offer a broad array of customers, including the 500,000 VMware has. “We are creating one of the world’s largest infrastructure technology companies,” Broadcom President and Chief Executive Hock Tan said on a conference call today. “With the addition of VMware, our software business will now represent close to half of our total pro forma revenue, with approximately $20 billion of software revenue for fiscal ’21.”
In particular, the deal could give Broadcom a pole position in the key market for networking, increasingly a central player in enterprise computing. “Broadcom has a nice little chip business with the almost all the hardware vendors for servers, PCs and devices, so having VMware customer and mission-critical workloads on their chips gives the company the ability to keep prices high — especially now during the chip shortage,” said John Furrier, CEO of SiliconANGLE Media, a longtime observer of both companies.
VMware’s NSX, a network virtualization and security platform that enables software-defined virtual cloud networks, has long aimed to take on the networking businesses of Cisco Systems Inc. and Arista Networks Inc., he noted. “Now with VMware and Broadcom, the commodity hardware could be more powerful than the big branded boxes,” he said. “They could own the network layer routing and switching on-premises and in the cloud.”
Given how central VMware is to many enterprises’ computing infrastructures, it’s a little odd that VMware has been a bit of a hot potato. Storage giant EMC Corp. had bought the Palo Alto, California-based company way back in 2003, and it moved over to Dell Technologies Inc. when it bought EMC in 2015.
But by many accounts, VMware struggled to get enough resources as a public company under Dell and its stock didn’t do as well as it might have as a result. “VMware stock has always suffered from the EMC and Dell ownership,” said Dave Vellante, chief analyst at SiliconANGLE Media sister market research firm Wikibon.
Founded in 1998, VMware makes virtualization software, which enables applications and workloads to be consolidated onto a smaller number of server computers, making it easier for servers to handle multiple applications. But as cloud computing rose, its value proposition became less certain even with its pervasive presence in data centers. After failing with its own cloud efforts, it did deals with cloud providers such as Amazon Web Services Inc., which ultimately turned out to be much more successful than expected.
Even so, the uncertain fit within Dell left VMware a bit at sea. Its longtime CEO Pat Gelsinger left last year to rejoin Intel Corp. as its CEO, succeeded last May by longtime VMware executive Raghu Raghuram.
For his part, Raghuram said the combined company will create “a remarkable enterprise software player. Collectively, we will deliver even more choice, value and innovation to customers, enabling them to thrive in this increasingly complex multicloud era.”
Investors appear to like the deal. VMware shares jumped more than 25% Monday after the deal was leaked, and it rose more than 2% this morning as Broadcom’s shares rose more than 3%.
Broadcom said Michael Dell and Silver Lake, which own 40.2% and 10% of VMware shares, respectively, have signed support agreements to vote in favor of the transaction. “Together with Broadcom, VMware will be even better positioned to deliver valuable, innovative solutions to even more of the world’s largest enterprises,” Dell founder and VMware Chairman Michael Dell said in a statement. “This is a landmark moment for VMware and provides our shareholders and employees with the opportunity to participate in meaningful upside.”
Some analysts agreed. “This could have implications for VMware customers as its recent spinoff from Dell was seen as the company’s chance to innovate and grow without hindrance,” said Forrester Inc. analyst Tracy Woo. “If Broadcom plans to enter the enterprise software market, it could be a boon into a new area that it doesn’t have much presence for outside of CA Technologies. It could extract some functionality from VMware’s portfolio to pad CA’s product capabilities.”
However, not everyone is sanguine about the impact on VMware customers. “Broadcom has a reputation for acquiring a company, increasing prices, lowering research investment and operating expense spending to 1% of revenue, and causing consternation amongst its customers,” said Patrick Moorhead, president and principal analyst at Moor Insights & Strategy. “Switching costs are high and the time to switch is long, essentially locking in customers.”
John Abbott, principal research analyst at 451 Research, part of S&P Global Market Intelligence, said the deal, which involves VMware becoming the umbrella for all of Broadcom’s software efforts, maintains VMware’s identity and relationships, which will be important given that cloud giants and chip companies both may perceive heightened competition with the combined company.
“This position is reinforced by the lack of any obvious and immediate synergies with Broadcom’s chip business (except perhaps for some networking and edge opportunities),” he said. “On the software side, while security expertise and IP from Symantec might bolster VMware’s own security offerings, it’s hard to see where the CA portfolio, much of it mainframe-oriented, will fit in. Critics and rivals will worry that this will slow VMware down with too much legacy overhead just at a point when emerging cloud native software stacks are making the traditional VMware virtualization platform less compelling than it once was.”
The deal still requires various approvals, and it includes a so-called go-shop provision under which VMware can look at other proposals for the next 40 days. Broadcom has gotten commitments from a consortium of banks for $32 billion in debt financing. It’s expected to be completed in Broadcom’s fiscal year 2023, which starts in November. Broadcom will also take on $8 billion of VMware net debt.
Both companies also reported quarterly earnings today. Broadcom reported a fiscal second-quarter profit of $2.59 billion, or $5.93 a share, up from $1.49 billion, or $3.30 a share, a year go. Revenue rose 23%, to $8.1 billion. VMware reported a fiscal first-quarter 2023 profit of $242 million, or $0.57 per diluted share, down 43% from a year ago, on a 3% rise in revenue, to $3.09 billion.