How Broadcom’s Purchase of VMware will Change the Cloud Computing Industry

The second-largest transaction in the world in 2022 will be $61 billion of Broadcom offer to buy VMware outright in cash.

Regulators from around the world are closely monitoring tech mergers due to concerns about the concentration of power in a small number of entities and the prospect that larger companies may acquire start-ups just to shut them down.

In addition to creating and producing semiconductors for modems, Bluetooth, and WiFi chips, Broadcom is also recognized for its chip business. These chips are used in a variety of products, including computers, gaming consoles, automobiles, and medical equipment. 

Prior to being spun out last year, VMware was a subsidiary of PC manufacturer Dell. Its primary areas of interest include cloud computing and the virtualization technology that has revolutionized x86 server-based computing.

The EU competition watchdog noted in its evaluation of Dell’s $67 billion acquisition of data storage giant EMC Corp in 2016 that EMC’s VMware had a strong position but lacked the capacity or incentive to stifle rivals.

With the purchase of VMware, Broadcom will be quickly recognized as a significant software provider, according to Futurum Research analyst Daniel Newman.

The agreement is also a win for Dell Technologies Inc. CEO Michael Dell, who last year separated VMware from the computer manufacturer.

Michael Dell owns 40% of VMware, while his financial backer, the private equity firm Silver Lake, owns the other 10%. Both of them have committed to supporting the accord in the vote.

A group of banks has already agreed to provide $32 billion in loan financing to Broadcom. As part of the deal, VMware, which claimed the offer was unsolicited, will be permitted to request bids from competing bidders for a period of 40 days.

Only Microsoft Corp.’s $68.7 billion acquisition of video game developer Activision Blizzard Inc. has been declared as the largest acquisition in the world thus far this year.

The offer price for each VMware share is $142.50 in cash or 0.2520 of a Broadcom share, which is a premium of almost 49% to the stock’s most recent closing price prior to news of the deal’s discussions breaking on May 22. Additionally, Broadcom would take on $8 billion of VMware’s net debt.

Hock Tan, the chief executive of Broadcom, used acquisitions to grow his business into one of the largest chipmakers in the world. He is now applying this deal-making strategy to the software industry.

The transaction will instantly increase Broadcom’s software-related revenue by roughly threefold, to about 45% of its overall revenues.

With the purchase of VMware, Broadcom will be quickly recognized as a significant software provider, according to Futurum Research analyst Daniel Newman.

This kind of play isn’t entirely out of the ordinary. VMware has experienced diminishing earnings and weak revenue growth in addition to its debt. This might aid the company in getting over such obstacles and boosting its competitiveness.

This type of activity isn’t entirely surprising. In addition to its debt, VMware has experienced diminishing profits and weak revenue growth. This could help the company overcome such obstacles and improve its competitiveness.

The agreement comes at a time when the Biden administration is pushing for more competition in all areas, from agriculture to technology.

The transaction is also a win for Dell Technologies Inc CEO Michael Dell, who broke out VMware from the computer firm last year.

If VMware chooses another bid after this time period has passed, the company will be required to pay Broadcom a $1.5 billion break-up fee.

If it decides to accept another offer before the deadline ends, it must pay a $750 million termination fee.

Broadcom forecasted higher-than-expected revenue for the third quarter, whereas VMware halted its full-year outlook owing to the pending purchase.

Broadcom’s board of directors has authorized a fresh $10 billion share repurchase program.

PLAN TO DIVERSIFY

Broadcom’s shift into software began after its attempt to acquire mobile chip giant Qualcomm Inc was denied on national security concerns by former US President Donald Trump in 2018.

Broadcom has now acquired CA Technologies Inc’s business software division for $18.9 billion and Symantec Corp’s security division for $10.7 billion. It also considered acquiring SAS Institute Inc, a provider of analytical software, but did not make a bid.

Broadcom then reduced costs at the acquired companies. It reduced the CA and Symantec businesses’ sales and marketing expenses from approximately 29% to 7% of their revenue.

The company is off to a solid start, saying that subscription and SaaS revenue was $899 million in the first fiscal quarter of this year, ending May 1, 2022, a 21% rise year over year. SaaS and subscription revenue accounted for 29% of overall revenue for the quarter, which increased 3% year over year to $3.09 billion.

VMware makes Advances into Telecommunications Technology

The firm has also expanded its supply of telecom technologies, including 5G compatibility. It released the VMware Telco Cloud Platform radio-access network (RAN) last year, allowing service providers to virtualize their RAN operations.

Raghuram has stated that assisting in the development of 5G infrastructure that extends to the edge and creates a blended environment where data center infrastructure includes cloud-like features will be a core business driver within the near future—a path Broadcom ought to be capable of continuing with its own chips in a variety of telecommunications equipment.

Analysts say VMware’s roots are in software, and how they advance virtualization, NFV (network functions virtualization), NSX, and their other core software technologies will be areas to watch. 

VMware is the global leader in the virtualization software business, which enables corporate clients to run several applications on their servers.

Enterprises utilize VMware’s technologies to operate their own servers in addition to cloud servers more efficiently. VMware has over 500,000 clients and collaborates with all of the main cloud providers, including Amazon, Microsoft, and Google.

The merged entity will provide enterprise customers with an expansive platform of key infrastructure remedies to accelerate innovation and resolve the most advanced data technology infrastructure needs by combining the supplementary Broadcom Software portfolio with the foremost VMware platform.

Customers, which include leaders in all industry verticals, will benefit from increased choice and flexibility in building, running, managing, connecting, and protecting applications at scale across diverse, distributed systems, irrespective of where they operate: from the data center, to any cloud, and to edge computing. Broadcom will provide compelling benefits to consumers and partners as a result of the combined firm’s shared focus on technological innovation and strong R&D spending.

However, talent at VMware has begun to depart the company due to uncertainty surrounding the deal’s impact and suggestions from Broadcom’s CEO about the end of remote work. Clients are sensing the anxiety when transactions fall apart, with a few smaller customers concerned that they may be left behind.

Under the fear of Broadcom’s impending purchase, work at VMware soon lost significance for staff. Aside from layoff concerns, employees are concerned about losing remote-work privileges and the company’s emphasis on inclusivity.

This industry has begun to stall as businesses have discovered new tools to run through cloud computing, prompting VMware to seek new solutions, including a relationship with Amazon.com Inc.

According to Keith Townsend, an analyst with the advisory firm CTO Advisor, Broadcom does not have a track record of investing heavily in research and development.

This might be bad news for VMware’s new product launches, according to Townsend, who also worked briefly for VMware as a corporate data center architect.

SmartNICs might be used in synergies

Another area where VMware and Broadcom could collaborate is the creation of smartNIC environments, which transfer server CPU duties onto a different device to create additional server cycles and assist software-defined cloud, compute, connectivity, storage, and security agencies designed for rapid enlistment in side, data centers, or service-provider networks.

VMware is already working on Project Monterey, a big virtualized environment that combines exposed systems, graphic processing units (GPUs), field configurable gate arrays (FPGAs), networking interface cards (NICs), plus security.

VMware’s SmartNIC, which includes an overall CPU, out-of-band administration, and virtualized device functionality, is a critical component. As a part of Monterey, VMware authorized their ESXi hypervisor to function on the NIC, providing a unified management framework for virtual machines.

Monterey contains a partnership deal involving VMware and GPU powerhouse Nvidia (Intel is also a major partner) to incorporate its BlueField-2 data packet and other technologies.

Some of these initiatives may be able to supplement Broadcom’s engineering efforts. Broadcom also has a smartNIC, the Stingray adaptor, which targets networking, storage, and security applications.

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