Broardcom Inc announced that it would acquire VMware Inc, a cloud computing company, in a 61 billion USD cash and stock deal. It is the chip manufacturer’s biggest bid to diversify its business into enterprise software.

The deal is the second-largest announced worldwide so far this year, following Microsoft Corporation’s 68.7 billion USD to acquire Activision Blizzard Inc, a video game company.

The offer of 142.50 USD in cash or 0.2520 of Broadcom shares for each VMware share marks a nearly 49 % premium over the stock’s final close before the agreement was announced on 22nd May. Broadcom will also take up 8 USD billion in debt from VMware. The chipmaker’s stock gained 3.5%, while VMware jumped 3.1%.

Hock Tan, the CEO of Broadcom, who built the company into one of the world’s largest chip manufacturers through acquisitions, is now applying his wheeling and dealing prowess to the software industry.

The transaction will boost Broadcom’s software-related earnings to about 45 percent of overall revenues in one swoop. With the acquisition of VMware, Broadcom would gain instant validation as a big software provider, said Futurum Research analyst Daniel Newman.

“Acquiring a business like VMware will open many doors for Broadcom that their present portfolio certainly doesn’t,” Newman continued.

More About the Deal

The agreement comes when the Biden administration is pushing for more competition in all areas, spanning agriculture to technology.

“The Federal Trade Commission (FTC) may be concerned that Broadcom may exploit the acquisition to bundle services or hike pricing,” said Josh White, a finance assistant professor at Vanderbilt University.

“Ultimately, the FTC will want to know if this consolidation will impact general competition and prices, particularly in this inflationary environment,” said White, a former financial economist for the Securities and Exchange Commission.

The transaction is also a win for Michael Dell, the CEO of Dell Technologies Inc, who split VMware from the computer maker last year. Michael Dell owns 40% of VMware, with Silver Lake, a private equity firm, owning the remaining 10%. They’ve decided to vote in favor of the deal.

Broadcom has already received 32 billion USD in debt financing pledges from a group of banks. As part of the deal, VMware would be able to solicit offers from competing bidders for 40 days, even though the offer was unsolicited.

If VMware chooses another bid after the time limit expires, it will be required to pay Broadcom a 1.5 billion USD break-up fee. If it chooses another offer before the time limit expires, it must pay a 750 million USD termination charge.

Both businesses released quarterly results, with Broadcom predicting higher revenue for the Q3 than expected and VMware suspending its full-year outlook owing to the pending purchase.

In addition, Broadcom’s board of directors recently approved a new 10 billion USD share repurchase program.

Broadcom’s Software Venture

Broadcom’s bid to diversify into software was started after acquiring mobile chipmaker Qualcomm was unsuccessful. Former US President Donald Trump had blocked the deal back in 2018 on national security grounds.

Since then, Broadcom acquired CA Technologies Inc, an enterprise software firm, for 18.9 billion USD and the security division of Symantec Corp for 10.7 billion USD. In addition, Broadcom had also considered purchasing SAS Institute Inc, an analytical software provider. However, later it decided against making a bid.

Broadcom then proceeded to cut costs at the acquired firms. It reduced the CA and Symantec businesses’ sales and marketing spending from around 29% to 7% of their revenue.

VMware is a leader in virtualization software, allowing businesses to run several applications on their servers. With the latest deal, VMware could offer innovations to its customers. But since, since Broadcom is not known for spending big on R&D, only the time will tell how the merger will play out.

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