Broadcom confirms bid for VMware at a staggering $61 billion in cash and stock; “Cloud Native” reigns supreme

Broadcom has confirmed its plan to acquire VMware for USD 61 billion in cash and stock. VMware will become the new name of the Broadcom Software Group, with just under half the chipmaker’s revenues coming from software following completion of the takeover.

Building on its previous acquisitions of CA Technologies and the Symantec enterprise business, Broadcom will create a new division focused on enterprise infrastructure software and the VMware brand. A pioneer in virtualization technology, VMware has expanded to offer a wide range of cloud software, spanning application modernization, cloud management, cloud infrastructure, networking, security and anywhere workspaces. The company was spun off from Dell Technologies last year, regaining its own stock market listing.

VMware shareholders will have a choice of USD 142.50 cash or 0.2520 shares of Broadcom common stock for each VMware share. This is equal to a 44% premium on VMware’s share price the day before news of a possible deal broke. The cash and stock elements of the deal will each be capped at 50 percent, and Broadcom will also assume around USD 8 billion in VMware debt.

Michael Dell and Silver Lake, which own 40.2% and 10% of VMware shares respectively, have agreed already to support the deal, so long as the VMware Board continues to recommend the sale to Broadcom.

Broadcom has obtained commitments from banks for USD 32 billion in new debt financing for the takeover. The company pledged to maintain its dividend policy of paying out 50% of annual free cash flow to shareholders, as well as an investment-grade credit rating after the acquisition. Completion of the deal is expected to take at least a year, with a target of the end of Broadcom’s fiscal year in October 2023. VMware will have 40 days, until  July 5th, to consider alternative offers.

The news was accompanied by the publication of quarterly results by the two companies. VMware reported revenues of USD 3.1 billion for the three months to April, up 3% from a year earlier, while net profit fell over the same period to USD 242 million from USD 425 million. Subscription and SaaS revenue was up 21%, leading to a subsequent fall in licensing revenue and higher costs for managing the transition to a SaaS model.

Over the same period, Broadcom revenues grew 23% to USD 8.1 billion, better than its forecast, and net profit jumped to USD 2.6 billion from USD 1.5 billion. Infrastructure software accounted for nearly USD 1.9 billion in revenue, up 5 percent year-on-year. With free cash flow at nearly USD 4.2 billion during the quarter and cash of USD 9.0 billion at the end of April, the company said it returned USD 4.5 billion to shareholders during the quarter in the form of dividends and buybacks. It also authorised a new share buyback program for up to USD 10 billion, valid until the end of December 2023.

The transaction is important to telecom network operators for a variety of reasons. Broadcom supplies some of the core chips for cable modems and other gadgets, including those that run Wi-Fi.  Meanwhile, VMware is an active player in the burgeoning “cloud native” space, whereby network operators run their software in the cloud. Indeed, VMware supplies a core part of the cloud platform that Dish Network plans to use to run its forthcoming 5G network in the U.S.

In its press release, Broadcom explained the benefits of the transaction:

“By bringing together the complementary Broadcom Software portfolio with the leading VMware platform, the combined company will provide enterprise customers an expanded platform of critical infrastructure solutions to accelerate innovation and address the most complex information technology infrastructure needs. The combined solutions will enable customers, including leaders in all industry verticals, greater choice and flexibility to build, run, manage, connect and protect applications at scale across diversified, distributed environments, regardless of where they run: from the data center, to any cloud and to edge-computing. With the combined company’s shared focus on technology innovation and significant research and development expenditures, Broadcom will deliver compelling benefits for customers and partners.”

As Reuters reported, Broadcom doesn’t have a history of investing heavily in research and development, which could cast a cloud over VMware supporters hoping to use the company to navigate the tumultuous market for cloud networking.  That is why the U.S. blocked Broadcom’s attempt to acquire Qualcomm in 2018.

“VMware should take heed of Symantec and CA Technologies’ experiences following their acquisition by Broadcom. CA Technologies reportedly saw a 40% reduction in U.S. headcount and employee termination costs were also high at Symantec,” analyst David Bicknell, with research and consulting firm GlobalData, said in a statement. “VMware currently has a strong reputation for its cybersecurity capability in safeguarding endpoints, workloads, and containers. Broadcom’s best shot at making this deal work is to let profitable VMware be VMware.”

References:

https://www.vmware.com/content/dam/digitalmarketing/vmware/en/pdf/company/vmware-broadcom.pdf

https://www.lightreading.com/service-provider-cloud/broadcom-makes-massive-$61b-bid-for-vmware/d/d-id/777848?

One thought on “Broadcom confirms bid for VMware at a staggering $61 billion in cash and stock; “Cloud Native” reigns supreme

  1. “Despite stock share increases, this isn’t welcome news for VMware customers,” Forrester Senior Analyst Tracy Woo bluntly stated in a report. “For acquired companies, a Broadcom acquisition sparks fear of price hikes, diminished support, and stunted innovation. At a time when VMware customers need to re-establish confidence in the company’s strategy and innovation plans after beloved ex-CEO Pat Gelsinger’s departure, this would be a notable departure from that course.”

    Woo cited Broadcom’s past acquisition “playbook” as a cautious path forward should the deal be completed. She specifically noted Broadcom’s $18.9 billion purchase of CA Technologies in late 2018, and its subsequent acquisition of Symantec for $10.7 billion in 2019.

    “Following these purchases, CA and Symantec customers saw massive price hikes, worsening support, and stalled development,” Woo wrote. “Symantec redirected its focus to its biggest resellers and customers. The company largely abandoned its customer base of 100,000 to prioritize its top 2,000.”

    Broadcom’s ill-handling of those two deals were cited by numerous industry analysts as being a significant concern to both Broadcom’s need to re-invent itself and VMware’s future.

    “In my conversations with them they do realize that they need to end up getting their arms around this and making it right,” Dennis Smith, VP and analyst at Gartner, said in an interview with SDxCentral. “So am I encouraged? I think the first step in dealing with a problem is understanding that you have a problem. And I think they kind of know that, but the question is are they able to actually handle it?”

    Broadcom President and CEO Hock Tan explained to investors in a subsequent call on the deal that his company plans to invest in what will be a significant part of Broadcom’s business.

    “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 [2021],” Tan said. “With this type of scale and continuing commitment to R&D and innovation, we will be able to significantly invest and fund new innovative solutions that will support our customer base to now dive deeper into the VMware market opportunity and products.”

    Despite the proclamations, Smith said the burden will be on Broadcom to show that it has learned from its past mistakes. A task even more important considering how much Broadcom will be paying for VMware and how important this deal will be for Broadcom and VMware’s future.

    “The bottom line is really the ‘e’ word: execution. How do they execute on it,” Smith said. “I think the table is set, there’s a potential here for them to reset. But again, they’re gonna really have to be 1,000-times better than they have been with CA and with Symantec.”

    https://www.sdxcentral.com/articles/analysis/broadcoms-vmware-pursuit-aggrieves-analysts/2022/05/

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