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31 May 2022

Broadcom’s purchase of VMware will turn it into a real software company 

Broadcom is still best known as a chip developer with very strong positions in transport networks, WiFi, broadband access and other parts of the telco platform. However, its attempts to expand further into cellular networks and devices have been thwarted, and since 2018 it has been broadening its business in a different way, by acquiring enterprise software firms. It snapped up Computer Associates (CA) and security provider Symantec, and now it has offered $61bn for cloud technology leader VMware. If that deal is approved, it will turn Broadcom into a real software company, with almost half of its revenues being generated from a division that will be rebranded with the VMware name. 


This is potentially a more significant change of direction for Broadcom than the previous software purchases represented. VMware, a pioneer in virtualization, was acquired by Dell EMC, and then spun out in 2021. It competes heavily with IBM’s Red Hat in enterprise and telecoms virtualization and has recently made a significant play for a leading role in open 5G networks, especially Open RAN.  


All of this would certainly offer new opportunities for Broadcom, and open up new fronts for engagement with telecoms suppliers, not least Dell itself, which is also seeking a significant role in Open RAN. However, VMware will take Broadcom management even further beyond their comfort zone than CA did, and will introduce complexities, not least what to do about VMware’s strategic alliance with Intel. Given the dominance of Intel in processors to support virtualized networks, this partnership could hardly be axed, but it would require delicate handling, given that Broadcom and Intel compete fiercely in certain sectors such as network processors and switch-chips. 


Intel itself has sometimes made acquisitions with a view to moving up the stack to control key software layers that run on its chips. It made its own foray into virtualization technology when it owned Wind River, and into security with McAfee, but subsequently sold both companies to focus on the semiconductor layer again. 


It remains to be seen whether Broadcom makes a similar volte-face down the road. The company has traditionally been admired for its strong sense of timing when making acquisitions, and has usually relied on M&A to enter new architecture markets rather than significant inhouse R&D. But its magic touch has sometimes deserted it, as with its attempt to buy its way into the cellular modem business with the purchase of Renesas’s 4G assets in 2013 – only to close down the division the following year. 


Broadcom itself was acquired by Singapore-based Avago in 2015, with Avago taking on its new unit’s name. It then relocated its headquarters to the USA in 2018 when it mounted a bid to buy Qualcomm, in its boldest attempt to become a cellular player. But despite becoming a US company, the bid was blocked by the US government anyway, prompting Broadcom to diversify in other directions, notably software. 


The key to the VMware deal, with all its potential complications, may lie in edge compute, which chip majors are eyeing as a future goldmine, driving architectures that will require large numbers of compute, acceleration, networking and AI processors. VMware has been evolving its cloud platform to become increasingly edge-centric, which in turn should help support telecoms applications such as 5G vRAN, as well as enterprise roll-outs.  


If the acquisition is approved, Broadcom’s software division will be almost as large, in revenue terms, as its chip operations, up from about 25% today. And analysts are already warning of potential price rises for VMware customers. Andrew Lerner of Gartner said: “Gartner expects Broadcom to increase pricing for VMware customers and adjust R&D spending, based on Broadcom statements and historical precedent with CA Technologies and Symantec.” 


He added: “Broadcom has publicly stated that it runs acquired software businesses differently than they were operating previously, to create financial returns consistent with their own ‘disciplined’ business model and reiterated on their call discussing the acquisition.” 


Under the terms of the deal, VMware shareholders can choose to receive either $142.50 in cash or 0.2520 shares of Broadcom common stock for each VMware share. Broadcom agreed to assume $8bn in VMware debt as well. There is also a ‘go-shop’ provision that allows VMware to seek alternative proposals over a 40-day period. If no other deal emerges, this one is expected to close during Broadcom’s 2023 fiscal year, which starts in November 2022. The deal has already won the support of Michael Dell and private equity firm Silver Lake Partners, who together hold 50.2% of VMware shares.  


Hock Tan, Broadcom’s CEO, told investors the acquisition would be a “very unique opportunity to take our company and its business to the next level … By adding VMware we will bring significant scale to Broadcom’s software business and reinforce our position as a premier provider of mission critical platform solutions to enterprises globally,” he said. 


If the deal is finalized, Broadcom Software Group will rebrand and operate as VMware, “incorporating Broadcom’s existing infrastructure and security software solutions as part of an expanded VMware portfolio”.