Broadcom’s acquisition of VMware is another software deal

If Wall Street were to invent a company, it would probably look a lot like Broadcom.

Once known primarily for its semiconductors, Broadcom has become something of a technology hedge fund, adding various potentially promising companies to its business portfolio, as part of CEO Hock Tan’s quest to turn it into a software game. Through multiple billion-dollar acquisitions, what has emerged is a conglomerate beloved by Wall Street analysts but difficult to view as a cohesive operation with a clear core business.

This week, it emerged that Broadcom was in talks to make an additional investment: Details on the VMware acquisition began leaking Sunday night, and the company officially announced the $61 billion cash and cash acquisition. shares on Thursday.

“We are creating one of the largest infrastructure technology companies in the world,” Tan said on a conference call Thursday to discuss the deal. “With the addition of VMware, our software business will now account for nearly half of our total pro forma revenue, with approximately $20 billion in FY21 software revenue.”

Broadcom has struggled to land big deals in the past. Last year, a potential $20 billion acquisition of business intelligence software maker SAS Institute fell apart a day after the deal was leaked to the Wall Street Journal. Broadcom made a hostile $130 billion takeover bid for Qualcomm in 2017, which was rejected by President Trump on national security grounds.

The current iteration of Broadcom exists in large part because of the $37 billion acquisition of the chip company by Avago, which has been led by current Broadcom CEO Hock Tan since 2006. brand, but still use Avago’s ticker symbol “AVGO”.

The original Broadcom had a colorful history, going against the SEC in 2008 and waging patent battles with Qualcomm. And there was a CEO that federal prosecutors indicted for drug trafficking, though they were ultimately dropped.

Since the Avago merger, which itself was the product of various financial deals in the early 2000s, Broadcom has entered into several significant software deals. It bought networking systems maker Brocade for $5.9 billion in 2017, software and services company CA Technologies for $18.9 billion in 2018, and Symantec’s enterprise security business in 2017. 2019 for $10.7 billion.

For Wall Street analysts, these are excellent ideas. The addition of software companies that focus on the business is diversifying its operations away from chips, which have always been a cyclical business, enduring years of dips and surges. Adding revenue from any source also gives Broadcom the financial foundation to gradually but steadily increase its dividend payments, which is exactly what Wall Street loves.

“It’s a great franchise,” Tan said in a call with financial analysts Thursday. “In terms of monetization, it’s all about execution. We think we’ll perform much, much differently – hopefully better – than what we’ve seen so far.

Today, Broadcom employs approximately 20,000 people worldwide and divides its business into four main parts: mainframe, enterprise and security software, and semiconductors. According to its latest annual report, its chip segments generated sales of $20.4 billion in fiscal 2021 and its software unit generated revenue of $7.1 billion.

Broadcom is probably best known as an Apple supplier – the company makes chips related to Wi-Fi and Bluetooth radios for iPhone and iPad, among other components. According to company filings, Apple accounted for about 20% of the company’s revenue in 2021.

Most of the other chips made by Broadcom end up in a batch of systems that exist behind the scenes, powering various aspects of the data center and other infrastructure. It manufactures Ethernet switches, optical components, chips to help storage devices, for example. Beyond the chips themselves, Broadcom also licenses its technology to other companies.

Similar to most major chip companies, Broadcom does not manufacture most of the chips it sells. Instead, it uses contract chipmakers such as TSMC to manufacture the semiconductors. The company has some ability to manufacture certain proprietary elements of its chips in-house, and says it does so to protect its own technology.

VMware does not manufacture hardware products, but its technology is closely related to server processors that most chips that Broadcom supports in various ways.

“They need to diversify out of the chip space,” said Tim Mueller, president of martinwolf, an M&A advisory firm focused on middle-market IT companies.

“Broadcom’s CEO has said many times that Broadcom’s growth rate cannot continue to increase as it is, so it makes perfect sense to start moving towards software. They’ve already acquired CA Technologies, they’ve already done Symantec, but that’s really going to be the icing on the cake for all of their software, because VMware is so strong with their virtualization software,” Meuller said. “And since VMware has partnered with Amazon Web Services for the extension of their cloud offering, it makes perfect sense for Broadcom to pursue them.

With VMware under its belt, it leaves Broadcom with about $90 billion in debt, according to an analysis by Evercore chip analyst CJ Muse, but that would roughly triple the size of Broadcom’s software business. Broadcom plans to fund the acquisition with $32 billion in new debt financing from a consortium of banks.

VMware secured a “go-shop” clause in the deal, allowing it to solicit bids from other parties through July 5. If VMware enters into a different transaction before then, it will owe Broadcom a $750 million breach fee, according to an SEC filing. If regulators block the deal, Broadcom would owe VMware $1.5 billion.

This story has been updated to include information from Broadcom’s conference call on the acquisition, and later with additional comments. Donna Goodison contributed to this report.