Broadcom said it is acquiring cloud computing company VMware in a $61 billion deal, the chipmaker’s biggest attempt to diversify its enterprise and software business.
Broadcom is best known for its chip business and the design and manufacture of semiconductors for modems, wireless networking and Bluetooth chips across multiple devices.
This acquisition represents the second largest deal announced globally so far this year. Microsoft’s $68.7 billion purchase of video game company Activision Blizzard came in first.
Broadcom CEO Huck Tan, who built his company into one of the world’s largest chip makers through acquisitions, draws on his dealmaking expertise and brings it into the software business.
The deal triples the company’s software-related revenue to about 45% of its total sales. The company becomes a major player in the software space through the acquisition of VMware.
The deal comes at a time of increasing push by the Biden administration to create more competition in all sectors.
But the FTC may be concerned that Broadcom may use the acquisition to bundle services or raise prices. You may want to know if the merger affects overall competition and pricing.
The agreement is also a useful move for Dell CEO Michael Dell, who separated VMware from the computer maker last year.
Michael Dell owns a 40% stake in VMware. While his financial backer, Silver Lake, owns 10%. Both agreed to vote in favor of the deal.
Broadcom does not have a large expenditure on research and development
The chip company has secured pledges from a consortium of banks to finance $32 billion in debt. VMware is allowed to solicit bids from competing bidders for a period of 40 days as part of the agreement.
If VMware chooses another offer after this time period has elapsed, it will have to pay Broadcom $1.5 billion. But if you decide to choose another offer before this period ends, the amount to be paid becomes $750 million.
Both companies also reported quarterly results, with Broadcom forecasting better-than-expected revenue for the third quarter. VMware has suspended its full-year outlook due to the pending acquisition.
Broadcom’s entry into software began after former US President Donald Trump blocked its bid to acquire mobile phone giant Qualcomm in 2018 for more than $100 billion on national security grounds.
The company has since acquired business software company CA Technologies for $18.9 billion. It also acquired Symantec’s security division for $10.7 billion. It explored the acquisition of analytical software company SAS Institute.
Broadcom has tried to cut costs in the acquired companies. It cut the sales and marketing budgets of CA Technologies and Symantec from about 29% of its revenue to 7%.
VMware dominates in the field of virtualization software. This allows corporate clients to run multiple applications across servers.
The field began to slow as companies found new tools to work through cloud computing. This prompted VMware to look for new offerings, including through a partnership with Amazon.