The chip manufacturer Broadcom is diversifying its offering and is going even deeper into the infrastructure software business with the VMware acquisition. […]
Broadcom’s decision to acquire VMware for $61 billion could mean big changes for the enterprise software market. This is what CEO Hock Tan’s methods suggest: he had conquered the microchip market for Broadcom by purchasing many components that might not be spectacular at first glance, but were nevertheless essential for the market. Then he lowered costs and increased synergies in order to finally use his pricing power and conquer further market shares on a large scale. As the Wall Street Journal speculates, he will try to transfer this approach to the enterprise software market.
The purchase of VMware, which was announced on Thursday, catapults Broadcom deep into the software business and should not only catch the attention of companies such as Oracle, Microsoft and IBM, but also many providers specializing in niche applications. Broadcom had already acquired CA Technologies and Symantec, thus underlining its entry into the software business. If the VMware acquisition is completed as planned, software revenues will almost triple and account for almost half of the company’s revenues.
Broadcom intends to settle half of the purchase in cash and half in shares. The chipmaker is also taking on eight billion dollars of debt from VMware. This brings the purchase price to $ 138 per share, which should please VMware shareholders: they will receive a premium of more than 40 percent on the price of VMware shares (prior to the announcement of takeover rumors).
Currently, VMware shares are still 40.2 percent owned by Michael Dell and ten percent in the hands of private equity investor Silver Lake. Both want to approve the transaction, provided that the VMware Supervisory Board is involved. In a conference call with analysts, Tan said that VMware has the characteristics Broadcom is looking for in acquisitions: “The company is an indispensable provider of mission-critical platform technology with a first-class customer base and an incredible drive for innovation.“
Tan had expanded Broadcom into a first address in the semiconductor market through a series of acquisitions. Among other things, the company supplies Wi-Fi chips for Apple iPhones and network components for large data centers. The CEO started his foray into the software business in 2018 with the acquisition of CA Technologies for 19 billion dollars. A year later, he bought Symantec’s cybersecurity division for $10.7 billion. A takeover of SAS Institute failed after its board of Directors withdrew after initial approval.
Broadcom pursues the goal of buying up companies that are deeply integrated into the IT infrastructure of large companies and thus create a certain dependence of their customers. The strategy is to tap synergies, reduce costs and cross-sell and upsell to get the most out of these customer relationships. Broadcom’s head of software Tom Krause explained this in an interview last November. Now he said Broadcom will focus on increasing VMware’s recurring revenues (“recurring revenues”). Companies such as CA, Symantec and now VMware are not only seen as strong brands, but also from an operational perspective and as building blocks in a “much larger game plan”.
The acquisition of VMware is expected to be completed by the end of Broadcom’s fiscal year (October 31, 2022). The merger agreement provides for a so-called go-shop clause, which allows VMware to actively advertise better offers over a period of 40 days (until July 5).
Although investors and analysts were initially rather skeptical about Broadcom’s software plans, the company’s strategy has so far worked out quite well. According to the Wall Street Journal, the software division generated an operating profit of $ 1.31 billion with sales of $ 1.83 billion in the last quarter. VMware, on the other hand, only achieved an operating profit of $ 783 million with revenues of $ 3.53 billion.
Broadcom generated $1.9 billion in network revenue in its most recent quarter – about a third of its total chip revenue. Tan is in close contact with data center operators, which he could now use to boost business with infrastructure software. VMware is known to be a pioneer in the field of virtualization software, with which companies can realize a better utilization of their hardware. In addition, VMware plays a key role in the hybrid cloud and multi-cloud market, where it is important to optimally distribute and orchestrate computing loads between private data centers and public cloud platforms.
Not so long ago, Broadcom CEO Tan wanted to develop his company in a completely different direction. His hostile takeover bid for the mobile chip manufacturer Qualcomm in the amount of 117 billion dollars was thwarted by the Trump administration in 2018 – for reasons of national security. That was when Broadcom turned to the software market.
Analysts do not consider it impossible that the US Federal Trade Commission (FTC) could still try to block this deal as well. After all, Broadcom could use its dominance to force customers to buy its other products or pay inflated prices. Last year, the chip group had already reached a difficult agreement with the FTC after the accusation that Broadcom had monopolized the market for chips in set-top boxes.
*Heinrich Vaske is Editorial Director of COMPUTERWOCHE, CIO and CSO as well as editor-in-chief of IDG’s European B2B brands. He takes care of the content orientation of the media brands – on the web and in the print titles.