While Broadcom’s $61 billion acquisition of VMware will further broaden the chipmaker’s growth prospects beyond semiconductors by giving it more enterprise software clout and recurring revenue, the immediate benefits are less apparent for VMware.
However, even while VMware will be getting its third owner since 2004, once the dust settles, the deal could provide stability for VMware and help shore up a business that’s been underperforming.
Broadcom officially announced the deal Thursday morning, several days after its intent to acquire VMware leaked out. The company will pay $61 billion in a cash and stock deal for VMware and fold the Broadcom Software Group, which contains previous acquisitions CA Technologies and Symantec, into a new organization called VMware.
"We think together, Broadcom’s software assets for the distributed enterprise can seamlessly complement and augment VMware's multicloud offerings in the areas of operation management, value stream and DevOps management, and security to address the entire application lifecycle," said Tom Krause, president of the Broadcom Software Group, on a conference call following the announcement.
VMware’s acquisition does not come as a total surprise.
“We have for several years expressed much caution on VMware given our concerns about VMware’s on-premise exposure, its overall growth profile and its ability to execute on a consistent basis,” Mizuho Group analyst Gregg Moskowitz said in a research note on Monday, after news of a pending deal leaked out. “Indeed, VMware has been a substantial underperformer for a long time and, prior to [Monday], the shares had declined by 51% over the last 4 years.”
Under the terms of the deal, VMware will have until July 5 to solicit other offers from other possible acquirers. Given the $61 billion price, however, there are only a handful of enterprise tech companies that have the resources to pursue such a deal.
The Big 3 (AWS, Microsoft and Google) cloud providers, Cisco Systems and Intel could be logical contenders to buy VMware, but some industry analysts don’t expect other suitors to step forward and thwart Broadcom’s deal.
“We ascribe low probability of interest from other parties, though logical ones might include hyperscalers Amazon and Google, and perhaps even Microsoft, given VMware’s 5,000-plus patent portfolio,” Deutsche Bank analyst Brad Zelnick said in a research note on Sunday, when news of the pending deal first leaked.
KeyBanc analyst Thomas Blakey also believes VMware is unlikely to field bids from other strategic suitors given VMware’s “relatively legacy position in multicloud.” But, he said in a research note on Sunday, VMware’s relatively inexpensive valuation could surface a non-strategic competing offer.
VMware could be an opportune target for Cisco, meanwhile, in terms of appetite and fit. Cisco could expand its range by leveraging VMware’s virtualization technology and has enough cash and the ability to obtain debt financing to pull off a deal.
VMware doesn’t plan to disclose any competing offers unless its board settles on a proposal that’s superior to Broadcom’s, the companies said in a news release on Thursday. Should VMware find a better offer before the July 5 deadline, it would owe Broadcom a $750 million break-up fee, according to a filing with the SEC.
A long enterprise history
VMware completed its spinoff from Dell Technologies last November. The company is known for its virtualization software, which played a key role in self-managed data centers for decades around compute, storage, networking and security. But under Raghu Raghuram, who will mark his one-year anniversary as CEO next week on June 1, it has continued to reposition around helping customers adopt multicloud approaches and hybrid work.
VMware’s vSphere virtualization platform is running more than 80 million workloads in the data centers of more than 300,000 customers. But after years of downplaying the existent threat of cloud computing, VMware struck a key “preferred public cloud provider” partnership with AWS to jointly engineer a vSphere-based cloud service running on AWS, and VMware on AWS initially launched in 2017.
The managed service, which is supported and billed by VMware, runs the VMware Software-Defined Data Center stack directly on bare-metal AWS infrastructure. VMware subsequently launched Azure VMware solution and Google Cloud VMware Engine, and its decision to partner directly with the Big Three cloud providers helped create the hybrid cloud era.
Raghuram told Protocol earlier this month that VMware’s separation from Dell has positioned the company to be the “Switzerland of the new multicloud industry,” allowing it to partner not only with cloud and software vendors but infrastructure providers that include Dell competitors such as HP and Lenovo.
VMware also has been making a bigger push into Kubernetes and containers with its Tanzu portfolio of products that helps customers modernize their applications.
It’s been prioritizing its subscription and SaaS product portfolio revenue, which accounted for a quarter of its $12.85 billion total revenue in the fiscal year that ended Jan. 29, up 22% from the prior-year period. But the transition from selling licensed software to data-center operators has been “choppy,” according to Moskowitz, and VMware’s subscription and SaaS business underperformed Wall Street’s expectations in four of the last five quarters.
Virtual machines, real effects
Based on its track record following its two other major software acquisitions — CA Technologies in 2018 and Symantec's enterprise security business the following year — Broadcom could target an estimated $5 billion-plus in cost savings to improve VMware’s margins and profitability, according to Bernstein analysts.
Jefferies analyst Brent Thill sees some potential vertical synergies from Broadcom's chips and VMware's virtualization software.
“Data center technologies have become a critical source of growth for Broadcom, and the company has doubled down on that area, with its previous two acquisitions in the IT infrastructure and data center software space,” Thill said in a research note on Tuesday. “Its CEO has publicly stated in the past that he looks for businesses that are franchises and ones that can be made more profitable without making huge additional investments. VMware certainly fits into that category given its long-standing position in the virtualization space and 30%-plus operating margins.”
Neil Jain, a partner at digital services firm West Monroe, sees more synergies with Broadcom deeper in VMware’s software portfolio with security and its Carbon Black Endpoint and Symantec’s endpoint business.
“On the telco side, Broadcom obviously sells a lot of their semiconductor and solutions around SD-Wan and stuff to telcos and MSOs [multistate operators], and VMware has an industry-specific telco solution – maybe there's a play between those,” Jain said. “Ultimately the goal would be to cross-sell the businesses and ... my guess is there's already a lot of customer overlap.”
Broadcom is a “logical home for VMware at the right price,” according to Macquarie software analyst Garrett Hinds, but he believes VMware had ample paths to independently deliver shareholder value as it continues to transition to SaaS.
“VMware has been independent for less than a year and has considerable value to unlock via internal programs,” he said in a research note on Tuesday.
Hinds expects Broadcom may eventually sell or cut investments in certain VMware categories, with professional services likely the first target.
“It may be sold to a channel partner or IT services firm,” he said. “While such a move would result in higher overall margin targets, customers may grumble.”
This story was updated to include information from the post-announcement conference call, and later with additional commentary.