Broadcom’s $61B deal to acquire VMware raises questions for customers

Semiconductor giant Broadcom inked a deal to acquire cloud software company VMware for $61 billion in cash and stock. But analysts told Fierce Broadcom has plenty of work to do to prove itself in the wake of the deal, both as a software player and to enterprise customers who highly value predictability and consistency.

Under the terms of the deal, VMware shareholders will have the choice to receive either $142.50 in cash or 0.2520 shares of Broadcom common stock for each VMware share. In addition to the cash and stock exchange, Broadcom agreed to assume $8 billion in VMware debt as part of the transaction.

Notably, the agreement includes a “go-shop” provision which will allow VMware to actively seek alternative proposals over a 40-day period. Assuming VMware doesn’t go with a different offer, its deal with Broadcom is expected to close sometime in Broadcom’s fiscal year 2023, which is set to begin in November of this year.

Broadcom noted the deal already has the backing of Michael Dell and private equity firm Silver Lake Partners, who together hold 50.2% of VMware shares. Dell owns the larger of the two stakes, with 40.2% of shares.

Hock Tan, Broadcom’s CEO, talked up the deal on a call with investors as a “very unique opportunity to take our company and its business to the next level.”

“By adding VMware we will bring significant scale to Broadcom’s software business and reinforce our position as a premier provider of mission critical platform solutions to enterprises globally,” he stated.

But analysts told Fierce Broadcom will have to prove itself to VMware’s enterprise customers.

“From an investor standpoint, it looks like a good move. I'm unsure, though, from a customer perspective,” Patrick Moorhead of Moor Insights and Strategy said. “Broadcom has a reputation for acquiring a company, increasing prices, lowering research investment and OPEX spending to 1% of revenue, [and] causing consternation amongst its customers. Switching costs are high and the time to switch is long, essentially locking in customers.”

Bola Rotibi, research director for CCS Insight’s Software Development practice, similarly raised the customer issue. “Above all, enterprise customers value predictability, consistency and a commitment to a development roadmap. Broadcom’s move will raise significant question marks for customers and will require careful management by all sides if this is to be a success,” she stated.

While she noted the deal will help Broadcom flesh out its infrastructure and cloud management portfolio, Rotibi warned acquiring VMWare won’t immediately turn Broadcom into a software company.

“This has significant integration risk and Broadcom must prove that it can integrate a silicon, software and services story,” she concluded.