Sun | Jun 26, 2022

Broadcom buys VMware for US$61b in latest big-tech deal

Published:Friday | May 27, 2022 | 1:23 AM

Computer chip and software maker Broadcom will spend about US$61 billion to acquire the cloud technology company VMware, one of the biggest deals of the year despite an environment of rising inflation and economic uncertainty.

The proposed deal comes just weeks after billionaire and Tesla CEO Elon Musk offered to spend US$44 billion on Twitter and it is second in size this year only to Microsoft’s nearly US$70 billion acquisition of Activision Blizzard, the maker of Candy Crush and Call of Duty.

With the perceived value of tech companies on the decline, at least for now, more buyouts could be on the way with targeted companies appearing relatively cheap.

And Broadcom CEO Hock Tan has been among the most aggressive buyers, building out the company with big acquisitions in recent years like Symantec for close to US$11 billion in 2019, and CA Technologies for about US$19 billion the previous year.

Broadcom wants to establish a stronger foothold in the cloud computing market and VMware’s technology allows large corporations to blend public cloud access with internal company networks. VMware has close relations with every major cloud company and provider, including Amazon, Google and Microsoft.

“VMware’s platform and Broadcom’s infrastructure software solutions address different but important enterprise needs, and the combined company will be able to serve them more effectively and securely,” Tom Krause, president of the Broadcom Software Group, said in a prepared statement Thursday.

The Broadcom Software Group will rebrand and operate as VMware once the transaction closes. The cash-and-stock deal also includes US$8 billion of VMware net debt.

Under the proposed offer, VMware shareholders can choose to receive either US$142.50 in cash or 0.2520 shares of Broadcom common stock for each VMware share.

VMware is already among the moving parts of the tech sector this year, with Dell Technologies Inc spinning off its 81 per cent equity stake in company only about 6 months ago. Michael Dell is still VMware’s chairman and he owns 40.2 per cent of the company’s outstanding shares.

“If Broadcom plans to enter the enterprise software market it could be a boon into a new area that it doesn’t have much presence for outside of CA Technologies,” wrote Tracy Woo, senior analyst with Forrester Research. “It could extract some functionality from VMware’s portfolio to pad CA’s product capabilities.”

Dell and Silver Lake, which owns 10 per cent of VMware’s outstanding stock, have signed support agreements to vote in favour of the transaction, as long as VMware’s board continues to recommend the proposed deal.

The transaction includes a “go-shop” provision, so VMware is allowed to actively solicit, receive, evaluate and potentially enter negotiations with parties that offer alternative proposals during a 40-day period.

To help finance the transaction, Broadcom has obtained commitments from a consortium of banks for US$32 billion in new, fully committed debt financing.

It’s anticipated that current Broadcom Inc. shareholders will own approximately 88 per cent and current VMware shareholders will own about 12 per cent of the combined company.

The boards of both California companies have approved the deal, which is expected to be completed in Broadcom’s fiscal year 2023. It still needs approval from VMware shareholders.

– AP