Broadcom to Acquire VMware in $61 Billion Enterprise Computing Deal

Broadcom, the semiconductor giant, said on Thursday it had agreed to buy software company VMware in a deal valued at $61 billion that would reshape the vast enterprise computing technology market. .

The deal, which would provide Broadcom with popular computing tools used by a wide range of businesses, would be the world’s second-biggest proposed acquisition this year, after Microsoft’s $75 billion bid for the video game company. Activision Blizzard, according to Dealogic data.

While the combination would make Broadcom a significant player in data center technology and cloud computing, it is not a meeting of household names, like the high-profile lawsuit of Elon Musk from Twitter. It does remind us, however, that tens of billions of dollars are spent each year on mergers between the many companies that make the technologies that power the Internet and large enterprise computer networks.

The deal with Broadcom is the latest in a series of ownership changes for VMware, a pioneering software company that helped create some of the key technologies now commonly used in cloud computing. VMware has more than 500,000 customers worldwide and partners with all major cloud providers, including Amazon, Microsoft and Google.

That makes VMware a valuable asset to Broadcom CEO Hock E. Tan. Broadcom will spend the equivalent of $138.23 per share on VMware as part of the cash and stock deal, it said in a statement. That’s more than 40% higher than VMware’s stock price before rumors of a deal started circulating last weekend.

VMware “provides the plumbing for most of the world,” Gartner analyst Dennis Smith said in an interview. VMware’s software manages more enterprise information than the combined public clouds of Amazon, Microsoft and Google, which have all fought to bring more of that data to their services, Smith said.

Mr. Tan had been one of the chip industry’s most successful forces, assembling Broadcom one deal at a time, until President Donald J. Trump blocked Broadcom’s proposed $117 billion takeover. from chipmaker Qualcomm in March 2018 for national security reasons. Broadcom, which was based in Singapore at the time, moved its headquarters to San Jose, California.

Since then, Mr. Tan has diversified his targets. He bought software company CA Technologies for $18.9 billion later in 2018 and a security division of Symantec for $10.7 billion in 2019.

In these deals, Mr. Tan sued established businesses that are critical to the company’s IT infrastructure. CA had started decades earlier providing software for mainframe computers and had evolved over the years into a product line, while Symantec had made a name for itself as a leader in cybersecurity tools.

Under the agreement, CA and Symantec will become part of VMware, which will be the new name for Broadcom’s software division. Whether Broadcom will give VMware decision-making autonomy is “the $61 billion question,” Smith said.

Broadcom said it would fund the deal with $32 billion in debt from numerous banks. The company said it plans to reduce its debt “rapidly” after the transaction. The chipmaker has followed a similar pattern in its recent software deals, jostling and then digesting by prioritizing debt repayments.

With its so-called virtualization software, which allows one computer to act like multiple machines and essentially makes computing more efficient, VMware would be Broadcom’s star asset. VMware has enhanced the role of software in data centers and revamped the way organizations manage their industrial PCs. The concepts behind VMware’s technology were the basis of cloud computing, which depends on virtualization.

VMware posted revenue of $12.9 billion in its most recent fiscal year, which ended Jan. 28. This is a 9% increase over the previous year. This growth rate was much slower than the cloud computing arms of Amazon, Microsoft and Google. Founded in 1998, before the cloud boom, VMware depended on customers who still operated their own data centers.

The deal is the latest in a series of major changes for VMware. The company, based in Palo Alto, Calif., lost its longtime chief executive, Pat Gelsinger, to Intel in January 2021. On May 12, it gained a new chief executive, Raghu Raghuram, and lost a managing director, Sanjay Poonen, on the same day. In November, the software company became independent when it separated from Dell Technologies.

Under Mr. Gelsinger, VMware was keen to spin off the personal computer maker that held the majority of its shares. Dell acquired the stake through its acquisition of EMC, which was the previous majority owner of VMware. VMware viewed independence as a strategic advantage, allowing it to forge new alliances with a variety of technology vendors. He also believed that Wall Street would reward him with a higher share price if he split from Dell.

Instead, the company’s shares are down 19% year-to-date through Friday, the last trading day before Bloomberg reports on negotiations with Broadcom.

Brad Zelnick, an analyst at Deutsche Bank, said VMware has lost its luster with public investors because it has struggled to compete with new cloud technology.

“They’ve been challenged as a business to adapt to this transition,” Zelnick said.

This stock plunge has made VMware a more attractive target for Mr. Tan, and potentially other suitors. If shareholders and regulators approve the deal, VMware’s long-desired independence will come to an end.

The terms of the agreement with Broadcom include a “go-shop” period, which gives VMware management 40 days to seek a better deal from another buyer. The VMware acquisition could make sense for several other technology companies, including IBM and Intel.

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