Broadcom’s purchase of VMware could drive up prices, while cost-cutting measures aimed at achieving profitability could negatively impact support and innovation.
In one of the biggest tech deals in history, chipmaker and infrastructure solutions provider Broadcom announced Thursday that it is buying the operating system virtualization pioneer. VMware in a $61 billion cash and stock deal.
If the deal, scheduled for completion in 2023, is passed, it will be The third largest technology acquisition in history second only to Microsoft’s purchase of game maker Activision Blizzard in 2022 for $70 billion and Dell’s purchase of EMC for $67 billion in 2015.
Why make this agreement?
“Building on our proven track record of successful mergers and acquisitions, this transaction combines our leading infrastructure and semiconductor software businesses with a pioneer and iconic innovation in enterprise software as we reimagine what we can offer our customers as a leading infrastructure technology company,” said Hock Tan. President and CEO of Broadcom, in statement.
Broadcom Software Group, a division of Broadcom, Inc. established in 2021, will change its name to VMware and expand the VMware portfolio with BSG’s existing infrastructure and security software solutions.
“If Broadcom is focused on innovation and prioritizes cross-business collaboration, then VMware and Symantec can build on some of the synergies,” said Naveen Chhabra, senior analyst at Forrester. “I see two challenges. First, that’s easier said than done, and second, Broadcom’s past acquisition strategy hasn’t demonstrated an innovation-focused mindset. ”
This purchase is just the latest in a long string of well-known acquisitions. In 2016, Broadcom purchased Brocade Communications Systems for $5.9 billion. In 2019 the company bought Symantec’s enterprise 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 Dell Technologies’ portfolio of companies at the end of 2021.
“Combining our assets and talented team with Broadcom’s existing portfolio of enterprise software, all under the VMware brand, creates a remarkable enterprise software player,” said Raghu. Raghuram, CEO of VMware, said in a statement. “Overall, we will deliver even more choice, value and innovation to our customers, helping them thrive in this increasingly complex multi-cloud era.”
How will the acquisition affect the business?
Although the deal would benefit VMware President Michael Dell and Silver Lake, which own 40.2% and 10% of VMware stock respectively, and make billions from salesSome analysts doubt whether customers will benefit.
A group of Forrester analysts wrote: “For acquired companies, a Broadcom acquisition stoked fears of price hikes, reduced support, and poor innovation. in a blog post about the agreement. “With VMware, the big question is whether Broadcom can leverage its vast portfolio of enterprise software and customer base to build a competent modern solution that extends from mainframes to edge computing. or not. Or does it continue with the same trend of forcing customers to license dollars at a time of rising global inflation? ”
For example, after Broadcom bought CA and Symantec, Forrester said customers saw large price increases, poor customer support, and less product development and innovation.
“Together with Broadcom, VMware will be even better positioned to deliver innovative, valuable solutions to many of the world’s largest enterprises,” Michael Dell, VMware’s Chairman of the Board, said in a statement. declare. “This is a landmark moment for VMware and offers our shareholders and employees the opportunity to participate in meaningful growth.”
Broadcom expects VMware to add $8.5 billion in procedural EBITDA to its profits within three years of closing, the company said in a statement. a press release about the deal. But this goal maybe too ambitiousaccording to reporter Jonathan Guilford of Reuters column.
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VMware earns $4.7 billion in 2022. Analysts expect it to continue to top revenue growth at 8% over the next few years, he said. Four years from now, that would equate to $18.5 billion in revenue and $6.5 billion in profits. Not $8.5 billion.
“So Tan’s goal requires some serious work,” Guilford said. “One path would be through supercharged growth. But to reach that $8.5 billion, VMware’s current scaling rate would have to be doubled. Alternatively, Broadcom may be looking to cut costs. But again, it’s not that simple. To hit Tan’s profit target, VMware’s margins would have to increase from 35% to 45%. ”
Broadcom’s services include data center storage and networking solutions; enterprise, mainframe and network security software focus on automation, monitoring and security; smartphone components; as well as telecommunications and factory automation solutions.
