Broadcom and VMware are good for investors, but customers could suffer

Broadcom’s purchase of VMware could increase prices, while cost-cutting measures to meet profitability targets could negatively impact support and innovation.

December 14, 2021, Brazil. In this photo illustration the Broadcom Corporation logo seen displayed on a smartphone

In one of the largest technology deals in history, chipmaker and infrastructure solutions provider Broadcom announced on Thursday that it is buying operating system virtualization pioneer VMware in a cash and stock deal worth $61 billion.

If the deal, which is expected to close in 2023, materializes, it will be the third-biggest tech acquisition in history, second only to Microsoft’s 2022 purchase of games maker Activision Blizzard for $70 billion. dollars and Dell’s purchase of EMC for $67 billion in 2015.

Why make this deal?

“Building on our proven track record of successful mergers and acquisitions, this transaction combines our core semiconductor and infrastructure software businesses with an iconic pioneer and innovator in enterprise software, as we are reimagining what we can offer customers as a leading infrastructure technology company,” said Hock Tan. , chairman and CEO of Broadcom, in a statement.

The Broadcom Software Group, a division of Broadcom, Inc. formed in 2021, will rebrand itself as VMware and expand the VMware portfolio with BSG’s existing infrastructure and security software solutions.

“If Broadcom is focused on innovation and making cross-enterprise collaboration a priority, VMware and Symantec can potentially leverage some synergies,” said Naveen Chhabra, senior analyst at Forrester. “I see two challenges though. First, this is easier said than done and second, Broadcom’s acquisition strategy in the past has not exhibited an innovation-driven mindset.

The purchase is just the latest in a long line of high profile acquisitions. In 2016, Broadcom bought Brocade Communications Systems for $5.9 billion. In 2019 the company bought Symantec’s enterprise security business for $10.7 billion in cash and in 2018 it bought CA Technologies for $19 billion in cash.

SEE: Feature Comparison: Time Tracking Software and Systems (TechRepublic Premium)

VMware was spun off from Dell Technologies’ portfolio of companies at the end of 2021.

“Combining our assets and talented team with Broadcom’s existing enterprise software portfolio, all hosted under the VMware brand, creates a remarkable enterprise software player,” VMware CEO Raghu Raghuram said in a statement. “Collectively, we will deliver even more choice, value and innovation to customers, enabling them to thrive in this increasingly complex multi-cloud era.

How will the acquisition affect businesses?

While the deal will be good for VMware Chairman Michael Dell and Silver Lake, who own 40.2% and 10% of outstanding VMware shares, respectively, and are expected to make billions from the sale, some analysts doubt that customers benefit.

“For acquired businesses, a Broadcom acquisition raises fears of price hikes, diminished support and delayed innovation,” wrote a group of Forrester analysts in a blog post about the deal. “With VMware, the big question is whether Broadcom can leverage a massive enterprise software portfolio and customer base to create a modern, capable solution that spans from the mainframe to the edge. Or does it continue with the same pattern of squeezing customers for licensing dollars in an era of rising global inflation?”

After Broadcom bought CA and Symantec, for example, Forrester said customers saw steep price increases, deteriorating customer support, and little product development and innovation.

“With Broadcom, VMware will be even better positioned to deliver valuable and innovative solutions to even more of the world’s largest enterprises,” said Michael Dell, chairman of VMware’s board of directors, in a statement. “This is a historic moment for VMware and offers our shareholders and employees the opportunity to participate in a meaningful upside.”

Broadcom expects VMware to add $8.5 billion of pro forma EBITDA to its bottom line within three years of closing, the company said in a news release about the deal. But that goal may be too ambitious, according to Reuters Breakingviews columnist Jonathan Guilford.

SEE: Windows, Linux, and Mac Commands Everyone Should Know (Free PDF) (TechRepublic)

VMware made $4.7 billion in 2022. Analysts expect it to continue growing revenue by 8% over the next few years, he said. In four years, that would equate to $18.5 billion in revenue and $6.5 billion in profit. Not $8.5 billion.

“So Tan’s target needs some serious work,” Guilford said. “One way would be to supercharge growth. But to reach that $8.5 billion, VMware’s current rate of expansion would need to double. Alternatively, Broadcom could seek to cut costs. But again, this is no small feat. To meet Tan’s profit target, VMware’s margin would need to increase from 35% to 45%.

Broadcom’s offerings include data center networking and storage solutions; enterprise, mainframe, and cybersecurity software focused on automation, monitoring, and security; smart phone components; as well as telecommunications and industrial automation solutions.

Leave a Comment