Broadcom’s $ 61 Billion VMware Buy Is a Bet on Unsexy Software TOU

Broadcom’s $ 61 Billion VMware Buy Is a Bet on Unsexy Software
 TOU

Broadcom’s $ 61 Billion VMware Buy Is a Bet on Unsexy Software

Broadcom Inc.

AVGO 1.42%

Chief Executive Hock Tan’s $ 61 billion deal to buy VMware Inc.

VMW 3.97%

marks the biggest bet yet that the boom in enterprise software demand will endure despite the economic tumult — and that bundling disparate offerings of low-profile products can yield outsize returns.

Mr. Tan built Broadcom into a microchip powerhouse by acquiring makers of a host of unsexy-but-essential components, then cutting costs and leveraging the company’s growing pricing power. He is now banking that the same model will work in corporate software.

The deal to buy VMware, announced Thursday after The Wall Street Journal reported on the talks earlier in the week, would push Broadcom deeper into a software world populated by incumbents such as International Business Machines Corp.

and Oracle Corp.

as well as independent companies that specialize in niche applications.

The buy would nearly triple the size of Broadcom’s software division and account for nearly 49% of the company’s revenue.

Under the deal, one of the biggest takeovers of the year, VMware shareholders will elect to receive either $ 142.50 in cash or 0.252 Broadcom shares for each VMware share. Based on Broadcom’s closing price Wednesday, the deal offers a total per-share value of $ 138.23, a 44% premium to VMware’s close on May 20, the last trading day before media reports of the deal. Broadcom will also assume $ 8 billion of VMware’s debt.

The boards of both companies have approved the deal.

Michael Dell and private-equity investor Silver Lake, which own 40.2% and 10% of VMware shares outstanding, respectively, have signed support agreements to vote in favor of the transaction, as long as the VMware board continues to recommend the proposed transaction with Broadcom .

The merger agreement provides for a “go-shop” provision under which VMware may actively solicit other proposals during a 40-day period that ends July 5.

The companies expect the deal to close during Broadcom’s next fiscal year. Following the close, Broadcom shareholders will own approximately 88% of the company and current VMware shareholders will own 12%.

Broadcom has increasingly sought to move into areas of software that are crucial for companies, said Daniel Newman, principal analyst of technology-focused advisory and analyst firm Futurum Research.

“VMware makes Broadcom more important to enterprises,” he said. “It puts them in a situation where Broadcom will be in every discussion.”

In premarket trading, VMware shares rose 1.4% to $ 122.25, while Broadcom added nearly 0.5% to $ 534.

After a two-year run of rapid expansion, the tech industry is struggling with postpandemic turbulence in e-commerce, digital advertising, PC sales and other areas. But the enterprise software market that Broadcom is buying its way into is shaping up to be a pocket of steady growth, even amid market uncertainty.

Research firm Gartner Inc. estimates that world-wide information-technology spending, which includes private data centers as well as the cloud, could grow 4% annually this year to $ 4.4 trillion, with faster growth for cloud technologies.

Mr. Tan has made Broadcom into one of the most unusual companies in the chip world — and now in software. He turned the company into a chip powerhouse through a series of acquisitions, eventually supplying Wi-Fi chips to iPhones and networking chips to big data centers, among other products. Then, in 2018, he began a similar approach in the software business, spending $ 19 billion for CA Technologies, a vendor of corporate and IT programs. The following year, he bought the corporate cybersecurity business of Symantec for $ 10.7 billion.

The goal: find companies with deep links into large corporations’ information-technology setups that would be difficult for them to abandon. Then cut costs and get the most out of their products by “cross-selling and up-selling” them, as Broadcom’s head of software, Tom Krause, described the strategy in November.

Despite investor and analyst skepticism at the outset, Broadcom’s software strategy has been a lucrative one. In Broadcom’s first fiscal quarter, its software division made $ 1.31 billion of operating revenue on $ 1.83 billion of sales. VMware, by contrast, reported $ 783 million of operating revenue on $ 3.53 billion of sales for its latest quarter.

VMware would expand Broadcom’s footprint in data centers, where it already has a presence through its chip division. Broadcom made $ 1.9 billion in networking revenue in its most recent quarter — about a third of its overall chip revenue — which Mr. Tan attributed largely to sales to data centers.

Found in 1998, VMware pioneered so-called virtualization software that lets one computer operate like many smaller computers. The software became a critical component of data centers as organizations looked to squeeze more performance out of their costly servers and turned VMware into one of the hottest companies in tech at the time.

In recent years VMware shifted its cloud strategy to helping organizations run software that connects their private data centers with the cloud platforms — a practice known as the hybrid cloud. In 2016, the company partnered with cloud computing leader Amazon.com Inc. VMware has established similar partnerships with the two other top cloud platforms, Microsoft Corp.

and Alphabet Inc.’s

Google.

The integration with the large cloud platforms has put VMware in a position to be a partner for organizations moving data from their private data centers to the cloud. VMware has also become an important player in the multicloud business, where organizations mix and match the various cloud platforms to get better pricing and service. VMware’s software helps companies work across the different cloud platforms.

VMware only recently became an independent company, having spun out of Dell Technologies Inc. last year. VMware had come under Dell’s ownership in 2016 as part of Dell’s $ 60 billion acquisition of EMC Corp.

Broadcom’s shift toward software comes after its hostile bid for mobile-phone chip maker Qualcomm Inc.,

a $ 117 billion deal that the Trump administration blocked on national-security grounds in 2018.

Mr. Tan may have reasoned that he could not buy semiconductor companies anymore because they were expensive at the time and he was worried about the regulatory risk, said Bernstein Research analyst Stacy Rasgon

The VMware deal could also draw regulatory scrutiny, analysts said. Bernstein Research calculates it has a 97% market share in virtualization software for servers with Intel Corp.

central processing units.

The US’s Federal Trade Commission could sue to block the deal, potentially making the case that Broadcom could use its dominance to force customers to buy its other products or pay higher prices, said Christopher Sagers, a law professor and antitrust expert at Cleveland State University.

Broadcom’s past behavior can also be considered in antitrust cases, Mr. Sagers said, including a settlement with the FTC last year over allegations it monopolized the market for chips in set-top cable and internet boxes.

The FTC has shown it is willing to intervene in large tech deals: it sued to block the proposed $ 40 billion acquisition of chip designer Arm by chip maker Nvidia Corp.

in December, and the deal subsequently was called off.

Write to Aaron Tilley at [email protected] and Asa Fitch at [email protected]

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