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Chipmaker Broadcom buys cloud services company VMware in $61 billion deal

Chipmaker Broadcom buys cloud services company VMware in $61 billion deal

May 26 (Reuters) – Broadcom Inc. (AVGO.O) On Thursday, it said it would acquire cloud computing company VMware Inc (VMW.N) In a $61 billion cash and stock deal, it is the chipmaker’s largest and boldest attempt to diversify its enterprise software business.

The acquisition is the second largest deal announced globally so far this year, after only Microsoft (MSFT.O) A $68.7 billion deal to buy video game maker Activision Blizzard Inc (ATVI.O).

Broadcom’s offer price of $142.50 per share of VMware represents a premium of nearly 49% over the stock’s last close, when deal talks were first announced on May 22. Broadcom will also take on $8 billion of VMware’s net debt.

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Shares of the electronic chip maker were down about 1% in pre-market trading Thursday, while shares of VMware were up 1.3%.

Hook Tan, Broadcom CEO, who built his company into one of the world’s largest chip makers through acquisitions, is bringing his deal-making guide to the software sector.

In one fell swoop, the deal would nearly triple Broadcom’s software-related revenue to about 45% of its total sales.

Daniel Neumann, an analyst at Futurum Research, said Broadcom will immediately be validated as a major software player with the acquisition of VMware.

“Having something like VMware … would have a large number of open doors that probably wouldn’t open their current wallet to them,” Newman added.

The agreement is also a coup for Dell Technologies Inc (DELL.N) CEO Michael Dell, who pulled VMware out of the computer maker last year.

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Michael Dell owns 40% of VMware stock, while its financial backer Silver Lake, the private equity firm, owns 10%.

VMware will be allowed to solicit bids from competing bidders for a period of 40 days as part of the agreement.

Broadcom’s pivot to software kicked off after its attempt to acquire mobile chip giant Qualcomm Inc (QCOM.O) It was banned by former US President Donald Trump in 2018 for national security reasons.

Since then, Broadcom has acquired business software company CA Technologies Inc for $18.9 billion and acquired the security division of Symantec Corp for $10.7 billion. It has also explored the acquisition of analytical software company SAS Institute Inc, but has not embarked on the bidding.

Broadcom continued to cut costs in the acquired companies. It cut CA and Symantec’s sales and marketing budgets from about 29% of their revenue to 7%.

VMware is dominant in the so-called virtualization software market, allowing corporate customers to run multiple applications on their servers.

This business began to slow as companies found new tools to work through the cloud, prompting VMware to seek new offerings, including through a partnership with Amazon.com Inc. (AMZN.O).

Keith Townsend, an analyst at CTO Advisor, said Broadcom doesn’t have a track record of spending big on research and development.

He added that this could be ominous for new product launches at VMware, Townsend, who also had a short stint with VMware as an enterprise data center engineer.

“As I speak to customers, they are in dire need of innovation from companies like VMware.”

Additional reporting by Shafi Mehta in Bengaluru, Kristal Ho in New York and Jane Lanhe Lee in San Francisco; Editing by Aditya Soni and Shunak Dasgupta

Our criteria: Thomson Reuters Trust Principles.