Broadcom agrees to buy VMware for $61-billion

Broadcom has agreed to buy cloud computing company VMware for about US$61-billion (R962-billion) in one of the largest technology deals of all time, turning the chip maker into a bigger force in software.

VMware shareholders can choose to receive either $142.50 in cash or 0.2520 shares of Broadcom stock for each VMware share, according to a statement on Thursday. The offer represents about a 44% premium to VMware’s closing price on 20 May, the last trading day before potential takeover talks were reported on in the media.

The deal is the biggest takeover ever for a chip maker and extends an acquisition spree for Broadcom CEO Hock Tan, who has built one of the largest and most diversified companies in the industry. VMware bolsters Broadcom’s software offerings — a key part of Tan’s strategy in recent years. He acquired corporate-software maker CA Technologies in 2018 and Symantec’s enterprise security business in 2019.

Broadcom’s offer — coming during a market downturn for tech stocks — has the support of key VMware shareholders Michael Dell and Silverlake, and includes a so-called go-shop provision that allows VMware to solicit competing offers.

Broadcom, one of the most valuable companies in the chip industry, sells components for everything from the iPhone to industrial equipment. But it’s seeing some of its biggest growth from data centres and bulking up on software helps it further serve that market.

The purchase adds to a run of deals for the global tech industry this year. Microsoft agreed in January to buy videogame publisher Activision Blizzard for $69-billion. A consortium backed by Vista Equity Partners is acquiring software maker Citrix Systems for $13-billion. And Elon Musk announced a $44-billion buyout of Twitter in April. The largest previous deal involving a chip maker was AMD’s $34.1-billion takeover of Xilinx.

Costs

Slashing expenses has been a key part of Tan’s strategy when he buys companies. Broadcom cut the cost base at CA and the Symantec business by 60-70%, according to Sanford C Bernstein.

“Building upon our proven track record of successful M&A, this transaction combines our leading semiconductor and infrastructure software businesses with an iconic pioneer and innovator in enterprise software,” said Tan in a statement.

Broadcom has received commitments from a consortium of banks for $32-billion in new, fully committed debt financing to help fund the deal, and is expected to be completed in Broadcom’s fiscal year 2023.

Broadcom was previously in talks to purchase SAS Institute, a closely held software company valued at $15-billion to $20-billion. But those discussions ended last year without agreement.

Broadcom’s most ambitious takeover attempt ever also failed to gain traction. The company tried to buy rival chipmaker Qualcomm but had to walk away from the deal in 2018 after resistance from the Trump administration in the US. Broadcom’s Singapore headquarters was an issue for regulators at the time, but the company has since switched its domicile to the US. It’s now based in San Jose, California, about 30km from VMware’s Palo Alto headquarters.

VMware is a pioneering Silicon Valley company that was founded in 1998, the same year as Google. It invented virtualisation software, which consolidated applications and workloads on a smaller number of server computers. The innovation made it easier for servers to handle more than one program.

Such software was valuable when businesses managed their own servers, but as companies began relying more on giant cloud providers, VMware’s role was less clear. It struggled to maintain growth and ultimately forged a partnership with Amazon.com, one of the biggest providers of cloud storage and services.

Even with the challenges, VMware could become the “crown jewel of Broadcom’s software division”, according to Angelo Zino, an analyst at CFRA.

VMware has already changed hands before. In 2004, it was acquired by storage technology giant EMC, which then sold a portion of its stake as part of VMware’s initial public offering three years later. The business passed to Dell Technologies when that company acquired EMC in 2016.

VMware spun off from Dell last year, but Dell and private equity backer Silver Lake remain top investors in the software company.

Software would help decrease Broadcom’s reliance on chips. But its earlier forays into that market haven’t always been cheered by investors. Tan has argued that he looks for businesses that are “franchises” — ones that hold a strong market position and can be made more profitable without pouring in huge investments.

Chip makers like Broadcom have enjoyed booming sales in recent years, fuelled by the spread of semiconductors into more products

Chip makers like Broadcom have enjoyed booming sales in recent years, fuelled by the spread of semiconductors into more products — as well as by the need for work-from-home technology during the pandemic. But Tan has warned that the boom times probably won’t last.

Even after giving a rosy sales forecast in March, Tan said that the semiconductor industry won’t be able to stay on its current trajectory. He expects the chip business to decelerate to historical growth rates of about 5%.

“If anyone tells you otherwise, don’t believe it, because it has never happened,” he said on a conference call at the time. Industry leaders claiming that the semiconductor industry can grow at the current rate for an extended period are “dreaming”, he said.  — (c) 2022 Bloomberg LP