If Wall Street had to invent a company, it would probably look a lot like Broadcom.
Once known primarily for its semiconductors, Broadcom has become something of a technology hedge fund, adding various potentially promising companies to its portfolio of businesses, as part of CEO Hock Tan’s quest to turn it into a software play. Through multiple billion-dollar acquisitions what has emerged is a conglomerate that is beloved by Wall Street analysts but difficult to look at as a coherent operation with a clear, core business.
This week, it emerged that Broadcom was in talks to make an additional investment: Details about the VMware acquisition started to leak Sunday evening, and the company officially announced the $61 billion cash and stock acquisition Thursday.
"We are creating one of the world's largest infrastructure technology companies," Tan said on a conference call Thursday discussing the deal. "With the addition of VMware, our software business will now represent close to half of our total pro forma revenue, with approximately $20 billion of software revenue for fiscal '21."
Broadcom has had trouble landing large deals in the past. Last year, a potential $20 billion acquisition of business intelligence software maker SAS Institute fell apart a day after the deal was leaked to The Wall Street Journal. Broadcom made a $130 billion failed hostile takeover bid for Qualcomm in 2017 that was slapped down by President Trump over national security concerns.
The current iteration of Broadcom exists largely because of the $37 billion acquisition of the chip company by Avago, which has been run by current Broadcom CEO Hock Tan since 2006. Confusingly, the executives elected to scrap the Avago corporate name and keep Broadcom as the corporate brand, but still use Avago’s stock ticker symbol “AVGO.”
The original Broadcom had a colorful history, running afoul of the SEC in 2008 and waging patent fights with Qualcomm. And it had one CEO that federal prosecutors indicted on drug charges, though they were eventually dropped.
Since the Avago merger, which itself was the product of various financial wheeling and dealing in the early 2000s, Broadcom has made several significant software deals. It bought networking systems maker Brocade for $5.9 billion in 2017, software and services company CA Technologies for $18.9 billion in 2018, and Symantec’s enterprise security business in 2019 for $10.7 billion.
To Wall Street analysts, these represent excellent ideas. Adding software businesses that focus on the enterprise diversifies its operations away from chips, which has historically been a cyclical business, enduring years of troughs and surges. Adding revenue, regardless of the source, also gives Broadcom the financial footing to gradually but consistently increase its dividend payments, which is exactly what Wall Street likes.
“This is a great franchise,” Tan said during a call with financial analysts on Thursday. “In terms of monetization, it's all about execution. We believe we will execute much, much different — hopefully better — than what we have been seeing so far.”
Today, Broadcom employs about 20,000 people around the world and divides its business into four broad parts: mainframe, enterprise and security software, and semiconductors. According to its latest annual report, its chip segments produced fiscal 2021 sales of $20.4 billion, and its software unit generated revenue of $7.1 billion.
Broadcom is probably best known as an Apple supplier — the company makes chips related to the Wi-Fi and Bluetooth radios for iPhones and iPads, among other components. According to the company’s filings, Apple accounted for about 20% of the company’s revenue in 2021.
Most of the rest of the chips Broadcom makes end up in a batch of systems that exist behind the scenes, powering various aspects of data center and other infrastructure. It makes ethernet switches, optical components, chips for helping storage devices, for example. Beyond the chips themselves, Broadcom also licenses its technology to other companies.
Similar to many of the largest chip companies, Broadcom doesn’t actually manufacture most of the chips it sells. Instead, it uses contract chipmakers such as TSMC to make the semiconductors. The company does have some capacity to make some proprietary elements of its chips in house, and says it does so to protect its own tech.
VMware doesn’t make hardware products, but its technology is intertwined with server processors that many of the chips Broadcom makes support in various ways.
“They have to diversify from the chips space,” said Tim Mueller, president of martinwolf, a merger-and-acquisition advisory firm focused on middle-market companies in the IT sector.
“The CEO of Broadcom has said over and over that the growth rate for Broadcom cannot continue to increase as it is, so it's a very logical move to start going towards software. They've already acquired CA Technologies, they've already done Symantec, but this will really be kind of the cherry on top of all of their software pieces, because VMware is so powerful with their virtualization software," Meuller said. "And as VMware partnered with Amazon Web Services for the extension of their cloud offering, it just makes all the sense in the world for Broadcom to go after them.”
With VMware under its belt, it leaves Broadcom with roughly $90 billion in debt, according to an analysis by Evercore chip analyst C.J. Muse, but it would roughly triple the size of Broadcom’s software business. Broadcom plans to finance the acquisition with $32 billion in new debt financing from a consortium of banks.
VMware did secure a "go-shop" clause in the deal, which allows it to solicit offers from other parties until July 5. Should VMware enter into a different transaction before that date, it will owe Broadcom a $750 million break-up fee, according to a SEC filing. If regulators block the deal, Broadcom would owe VMware $1.5 billion.
This story was updated to include information from the Broadcom conference call about the acquisition, and later with additional commentary. Donna Goodison contributed to this report.
