Broadcom acquires VMware for $61 billion in second-biggest deal of 2022

Semiconductor major Broadcom Inc will acquire cloud and virtualization company VMware in a cash and stock deal valued at $61 billion. Broadcom’s Software Group, which offers infrastructure and security solutions, will also be rebranded and merged within VMware. With this deal, Broadcom will also take over $8 billion of VMware’s net debt. 

This is the second biggest deal of 2022 after Microsoft’s $68.7 billion acquisition of Activision Blizzard that was announced in January. 

For Broadcom, this is their fourth major acquisition in the enterprise software and cloud segment after network switch maker Brocade, which it acquired in 2016 for $6 billion. This was followed by the acquisition of automation software firm CA Technologies in 2018 for $19 billion and Symantec's enterprise security business in 2019 for $10 billion. 

The VMware deal will boost Broadcom’s footing in enterprise software, particularly hybrid cloud, a fast-growing segment with higher margins, said industry experts. 

“Optimization of VMware on silicon directly will help in embedded applications. Broadcom already has Symantec which is strong in security and CA which is good at the automation. With this acquisition, Broadcom comes across as a company with a strong set of tools for hybrid cloud, right from embedded chip, to network layer, to security, to automation and now virtualization,” said Sanchit Vir Gogia, chief analyst and chief executive of Greyhound Research. 

Gogia further points out, that Broadcom has a very private equity mentality. “When it acquired Symantec it stripped down sales and operations and made the company a lot more profitable by focusing more on top paying clients. This can be a good thing for VMware as it can benefit from streamlining from a profitability perspective. Broadly, the go-to market and integration of products will become stronger,” added Gogia. 

Founded in 1998, VMware is one of the top solution providers in virtualization and cloud computing. It claims to be the first to virtualize x86 architecture. According to Gartner, VMware was the number one company in the global virtualization infrastructure software market in 2021 with a 72% market share and revenue of $5.9 billion. 

Broadcom was the sixth leading company in the global semiconductor market in 2021, with a revenue of $18.8 billion, according to Gartner. 

Under the agreement with Broadcom, VMware shareholders will elect to receive either $142.50 in cash or 0.2520 shares of Broadcom common stock for each VMware share.

According to Broadcom, the transaction is expected to add approximately $8.5 billion of pro forma earnings before interest, taxes, and depreciation (EBITDA) from the acquisition within three years post-closing. Pro forma for each company’s fiscal year 2021, software revenue is expected to account for approximately 49% of total Broadcom revenue.

Hock Tan, president, and chief executive officer of Broadcom said the deal will allow his company to combine its semiconductor and infrastructure software businesses with an innovator in enterprise software. “It will drive even greater value for our combined stakeholders,” he added. 

Raghu Raghuram, chief executive officer of VMware also believes that combining their assets and talented team with Broadcom’s enterprise software portfolio, under the VMware brand, will help them “deliver even more choice, value and innovation to customers and thrive in this increasingly complex multi-cloud era.”

VMware was a subsidiary of Dell until last October when the two companies announced a separation. Dell divested its 81% stake in VMware through a tax-free distribution of shares to all stockholders. It included an $11.5 billion special cash dividend that resulted in a $27.40 per share dividend payment on November 1, 2021, to all VMware stockholders.