Chipmaker Broadcom is buying VMware in a $61 billion deal

May 26 (Reuters) – Broadcom Inc (AVGO.O) announced on Thursday that it is acquiring cloud computing company VMware Inc (VMW.N) in a $61 billion cash and stock deal will, the chipmaker’s biggest and boldest bid to diversify its business into enterprise software.

The acquisition is the second largest announced globally so far this year, behind only Microsoft Corp (MSFT.O)’s $68.7 billion deal to buy video game maker Activision Blizzard Inc. (ATVI.O) .

The offer of $142.50 in cash, or 0.2520 Broadcom shares for each VMware share, represents a nearly 49% premium over the stock’s last close before the transaction was first discussed on May 22. Broadcom will also assume $8 billion of VMware’s net debt.

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Shares of the chipmaker closed down 3.5% and VMware rose 3.1%.

Broadcom Chief Executive Hock Tan, who built his company through acquisitions into one of the world’s largest chipmakers, is now bringing his dealmaking playbook to the software sector.

In one fell swoop, the deal will nearly triple Broadcom’s software-related revenue to about 45% of its total revenue.

Broadcom’s acquisition of VMware immediately reaffirms it as a major software vendor, said Daniel Newman, an analyst at Futurum Research.

“Having something like VMware … will open a significant number of doors that their current portfolio probably doesn’t open for them,” Newman added.

The deal comes at a time when the Biden administration is pushing for more competition in every sector from agriculture to technology.

“The Federal Trade Commission (FTC) may be concerned that Broadcom will use the acquisition to potentially bundle services or raise prices,” said Josh White, an assistant professor of finance at Vanderbilt University.

“Ultimately, the FTC will want to understand whether this consolidation would affect overall competition and prices, especially in this inflationary environment,” said White, also a former Securities and Exchange Commission financial economist.

The deal is also a coup for Dell Technologies Inc. (DELL.N) chief executive Michael Dell, who spun off VMware from the computer maker last year.

Michael Dell owns a 40% stake in VMware, while his financier Silver Lake, a private equity firm, owns 10%. Both have agreed to vote for the deal.

Broadcom has already secured commitments from a syndicate of banks for $32 billion in debt financing. VMware, which said the bid was unsolicited, is allowed 40 days to solicit bids from competing bidders under the agreement.

If VMware selects another bid after that deadline, the company will have to pay Broadcom $1.5 billion as a break-up fee.

However, if the company decides to make another offer before the end of this period, it will have to pay a termination fee of US$750 million.

Both companies also reported quarterly results, with Broadcom forecasting better-than-expected third-quarter revenue, while VMware suspended its full-year outlook due to the upcoming acquisition.

Broadcom’s board of directors also approved a new stock buyback program of up to $10 billion.

OFFER FOR DIVERSIFICATION

Broadcom’s shift to software began after a 2018 attempt to acquire cellular chip giant Qualcomm Inc (QCOM.O) was blocked by former US President Donald Trump on national security grounds.

Since then, Broadcom has acquired enterprise software company CA Technologies Inc for $18.9 billion and acquired Symantec Corp’s security division for $10.7 billion. It was also considering acquiring analytics software company SAS Institute Inc, but didn’t go forward with an offer.

Broadcom then proceeded to reduce costs at the acquired businesses. It slashed the sales and marketing budgets of the CA and Symantec divisions from about 29% of their revenue to 7%.

VMware dominates the market for so-called virtualization software, which allows enterprise customers to run multiple applications on their servers.

That business has started to slow as companies have found new tools to operate through cloud computing, prompting VMware to seek new offerings, including through a partnership with Amazon.com Inc (AMZN.O).

According to Keith Townsend, an analyst at consulting firm CTO Advisor, Broadcom doesn’t have a track record of spending heavily on research and development.

This could bode badly for new product launches at VMware, said Townsend, who also spent a brief stint at VMware as an enterprise data center architect.

“When I speak to customers, they desperately need innovation from companies like VMware.”

Broadcom offers to pay $61 billion for VMware
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Reporting by Chavi Mehta in Bengaluru, Krystal Hu in New York and Jane Lanhee Lee in San Francisco; Additional reporting by Eva Mathews; Writing by Sweta Singh; Edited by Aditya Soni and Shounak Dasgupta

Our standards: The Thomson Reuters Trust Principles.

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