Broadcom’s purchase of VMware could increase prices, while cost-cutting measures aimed at meeting profitability targets could negatively impact support and innovation.
In one of the largest tech deals in history, chipmaker and infrastructure solutions provider Broadcom announced Thursday that it is buying OS virtualization pioneer VMware in a $61 billion cash and stock deal.
If the deal, which is expected to close in 2023, goes through, it will be the third largest tech acquisition in history just behind Microsoft’s 2022 purchase of gamemaker Activision Blizzard for $70 billion and Dell’s purchase of EMC for $67 billion in 2015.
Why make this deal?
“Building on our proven track record of successful mergers and acquisitions, this transaction combines our leading semiconductor and infrastructure software companies with an iconic pioneer and innovator in enterprise software, while rethinking what we can offer customers as a leading infrastructure technology company Hock Tan said. , Broadcom’s president and CEO, in a statement†
The Broadcom Software Group, a division of Broadcom, Inc. founded in 2021, will rename itself as VMware and expand the VMware portfolio with BSG’s existing infrastructure and security software solutions.
“If Broadcom focuses on innovation and makes business collaboration a priority, VMware and Symantec may be able to build on synergies,” said Naveen Chhabra, senior analyst at Forrester. “However, I see two challenges. First, it’s easier said than done, and second, Broadcom’s past acquisition strategy has not shown an innovation-oriented mindset.”
The purchase is just the latest in a long line of high-profile acquisitions. In 2016, Broadcom bought Brocade Communications Systems for $5.9 billion. In 2019, the company bought Symantec’s corporate security business for $10.7 billion in cash and in 2018 it bought CA Technologies for $19 billion in cash.
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VMware was spun off from the Dell Technologies portfolio of companies in late 2021.
“Combining our resources and talented team with Broadcom’s existing enterprise software portfolio, all under the VMware brand, creates a remarkable enterprise software player,” VMware CEO Raghu Raghuram said in a statement. “Together, we will provide customers with even more choice, value and innovation, enabling them to thrive in this increasingly complex multi-cloud era.”
What consequences will the takeover have for companies?
While the deal will benefit VMware chairman Michael Dell and Silver Lake, who own 40.2% and 10% of VMware’s outstanding shares, respectively, and make billions from salessome analysts have doubts about whether customers will benefit from it.
“For acquired companies, a Broadcom acquisition raises fears of price increases, diminished support and stunted innovation,” wrote a group of Forrester analysts. in a blog post about the appointment. “With VMware, the big question is whether Broadcom can leverage a huge enterprise software portfolio and customer base to build a competent modern solution that spans from mainframe to edge. Or will it continue the same trend of squeezing customers for license dollars at a time of rising global inflation?”
For example, after Broadcom bought CA and Symantec, Forrester said customers saw large price increases, poorer customer support, and little product development and innovation.
“Together with Broadcom, VMware will be even better positioned to deliver valuable, innovative solutions to even more of the world’s largest enterprises,” said Michael Dell, VMware’s chairman of the board of directors, in a statement. “This is a milestone for VMware and an opportunity for our shareholders and employees to participate in a meaningful upgrade.”
Broadcom expects VMware to add $8.5 billion in pro forma EBITDA to its bottom line within three years of closing. a press release about the deal† But this goal maybe too ambitiousaccording to Reuters Breakingviews columnist Jonathan Guilford.
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VMware earned $4.7 billion in 2022. Analysts expect it to continue to grow its revenue by eight percent in the coming years, he said. In four years, that would equate to $18.5 billion in revenue and $6.5 billion in profit. Not $8.5 billion.
“Tan’s target therefore requires serious work,” Guilford said. “One path would be through super-charging growth. But hitting that $8.5 billion would require VMware’s current expansion rate to double. Alternatively, Broadcom could be looking to cut costs. But again, it’s no easy feat. To meet Tan’s profit target, VMware’s margin would need to increase from 35% to 45%.”
Broadcom’s offerings include network and storage solutions for data centers; enterprise, mainframe and cybersecurity software focused on automation, monitoring and security; smartphone components; as well as telecom and factory automation solutions.