Broadcom Reportedly Pursuing ‘Cash Cow’ VMware for Acquisition, Software Expansion

Broadcom reportedly is pursuing VMware for an acquisition that would expand its software business by a factor of three.

Bloomberg on Sunday evening reported that chipmaker Broadcom has entered discussions with VMware leaders around buying the software provider. The potential deal would drastically expand Broadcom’s software play. Bernstein analysts told clients that the deal would triple Broadcom’s software business and make software account for one-half of the company. Reuters writes that an acquisition of VMware would let Broadcom access data centers to better serve cloud customers.

The talks are ongoing and private, people close to the matter say. Bloomberg lists VMware’s market valuation at approximately $40 billion and infers that a deal price would likely exceed such a number.

Michael Dell, chairman and CEO at Dell Technologies, owns a $16.2 billion stake in VMware. That sets up Michael Dell as a “kingmaker” in the acquisition talks, Bloomberg writes.

Broadcom has made a series of aggressive acquisitions in software world in recent years. It bought storage networking provider Brocade for $6 billion in 2016. It also notably tried to buy semiconductor software provider Qualcomm for $117 billion before former President Trump blocked the deal. In 2018 the chipmaker bought infrastructure software provider CA Technologies. Broadcom in 2020 then paid $10.7 billion for the Symantec enterprise security business and ultimately sold the security services portion to Accenture.

A Financial Play?

Analysts have already weighed in on the potential deal.

Chipmaker, @Broadcom looking to buy @VMware seems a bit odd to me, but nothing is normal these days.

Current @VMware market cap is ~$40 billion. Broadcom’s market cap is ~$223 billion.@om @furrier @Craw @rseroter @cxi @digitalcloudgal @BillMew @nyike @symantec @CAinc @nyike https://t.co/Rmg2jTaTzR

— Sarbjeet Johal (SJ) (@sarbjeetjohal) May 23, 2022

Omdia’s Roy Illsley

According to Roy Illsley, Omdia‘s chief analyst of IT ecosystem and operations, deals have not gone well for the companies Broadcom has acquired.

“To be honest, Broadcom have killed CA and Symantec as brands (although these have helped Broadcom’s overall financial position), so I do not see any value other than they (Broadcom) may have cash to burn and need to make an investment that will also add to its overall financial performance,” Illsley told Channel Futures.

Watershed Moment for VMware

Illsley expressed doubt about the value of a potential VMware acquisition.

“I would see this as Broadcom acquiring a cash cow in VMware, but beyond that am struggling to see any real synergies. VMware are re-inventing themselves, but mainly for existing customers; the new customers entering the cloud-native, and soon WebAssembly app development market will not care about the legacy virtual machines. Tanzu is a good product that addresses the transition from VM to cloud-native, but is of interest to existing customers, so is very much a way to reduce the loss of customers to the allure of K8S.”

He said VMware’s reported $40 billion market value seems high despite the company’s sizable customer base. He pointed to VMware’s challenges in adopting a subscription model.

SilliconAngle’s Dave Vellante

“I would not be surprised if Intel [is] not watching this closely, given Pat [Gelsinger]’s history at VMware. If you asked me would VMware be acquired a few years ago, the answer would have been no, but now the market has changed and virtual machines are not the dominant technology they were, so we are at one of the transition points where a large dominant vendor is receding and needs to reinvent itself for the new market opportunity. VMware has the ability to do this, but unlike vendors like IBM that have been reinventing themselves for decades, this is VMware for the first time facing a market where it is the legacy technology.”

Anurag Agrawal is founder and chief global analyst at Techaisle, said the deal makes sense for multiple reasons.

Techaisle’s Anurag Agrawal

“Broadcom has wanted to diversify into software for a long time. It has already acquired CA and Symantec. VMware market cap is down 18%-19% this year and hence becomes a great acquisition target. VMware has a current market cap of $40.3 billion and is trading at 10X EBITDA, which is lower than Broadcom’s at 12X,” Agrawal told Channel Futures. “Regardless, Project Monterey, a re-architecture of VCF [VMware Cloud Foundation] from the hardware up to support all new requirements of modern applications, announced by VMware in September 2020, is attractive to Broadcom. It can augment the role of data processing units to improve efficiencies for AI/ML workloads.”

And how would the deal impact channel partners?

“Broadcom is not known for its partner strategy, but hopefully it will leave VMware alone to continue its partner transformation if the deal goes through,” Agrawal said.

Mixed Reactions

Dave Vellante, co-CEO of SilliconAngle, said an acquisition would be a great deal for Broadcom.

The CTO Advisor’s Keith Townsend

“[CEO] Hock Tan is a business genius, and this would be a huge chess move. So many possibilities. The ultimate arms dealer. And yes … Broadcom would be infrastructure for supercloud providing Nitro-like capabilities for all,” Vellante wrote on Twitter.

Keith Townsend, CEO of The CTO Advisor, disagreed.

“I don’t see Broadcom as a leader in the integration of the software and hardware needed. I don’t see the addressable market in a term that investors will be happy. This is pie in the sky at this point. What’s the event horizon for an ROI?” he wrote.