Broadcom confirms $61 billion offer to buy VMware

• Broadcom has confirmed the rampant speculation
• It has offered to pay $61 billion in cash and stock for VMware
• It will also take on $8 billion of VMware debt, valuing the deal at $69 billion
• Broadcom Software Group will merge with, and take the name of, VMware
• The VMware board is ready to entertain any better offers (up to 5 July)

Confirming the speculation that emerged last weekend, Broadcom has announced its bid to acquire VMware for $61 billion in cash and stock: As part of the deal, the chip giant will also take on $8 billion of VMware debt, taking the value of the deal to a staggering $69 billion.

The speculation about an impending deal had already lit a fire under VMware stock, which has gained almost 28% in value this week to $121.71, though that price is some way short of the $138.23 per share that Broadcom says its offer is worth. VMware two largest shareholders, Michael Dell (40.2% stake) and Silver Lake (10% stake), “have signed support agreements to vote in favour of the transaction, so long as the VMware Board continues to recommend the proposed transaction with Broadcom,” the companies noted.

Broadcom’s investors are warming to the deal, even though it involves Broadcom having to obtain commitments from multiple banks to take on board $32 billion in debt financing: The chip firm’s stock had dipped by almost 5% this week to $531.63, but started climbing once the details of the offer were released, gaining 2% to $542.58.

What has been most interesting about the move is the rationale behind it – why would Broadcom want to buy VMware?

Well, in a nutshell, Broadcom believes VMware provides the “flexible, consistent digital foundation on which the largest and most dynamic enterprises across industries build, run, manage, connect and protect their most important and complex workloads for the benefit of their customers.” As such, it sees VMware as the perfect vehicle for its software strategy.

To that end, the current Broadcom Software Group, which generates about a quarter of the company’s sales, “will rebrand and operate as VMware, incorporating Broadcom's existing infrastructure and security software solutions as part of an expanded VMware portfolio.” That existing “infrastructure and security software solutions” portfolio comes, as we noted earlier this week, from the previous acquisitions of CA Technologies and the enterprise security division of Symantec. If the deal is completed, Broadcom would have a software division with annual revenues of about $20 billion, based on current revenue run rates.

By creating this new software Group, Broadcom believes “the combined company will provide enterprise customers an expanded platform of critical infrastructure solutions to accelerate innovation and address the most complex information technology infrastructure needs. The combined solutions will enable customers, including leaders in all industry verticals, greater choice and flexibility to build, run, manage, connect and protect applications at scale across diversified, distributed environments, regardless of where they run: from the data center, to any cloud and to edge-computing.”

The full details, including the permutations of how VMware shareholders will be compensated if the deal is completed, can be found in this press release.

Is that a compelling enough rationale? Might there be a more suitable suitor for VMware? Well, if there is, and it has deep enough pockets, there is now a 40-day window for it to engage with the VMware board, which, under the terms of the takeover offer, “may actively solicit, receive, evaluate and potentially enter negotiations with parties that offer alternative proposals during a 40-day period following the execution date of the definitive agreement, expiring at 11:59 p.m. Pacific Time on July 5, 2022.”

The official announcement of the takeover offer came as Broadcom announced its fiscal second quarter results (for the three months that ended 1 May). Revenues were up by 23% to $8.1 billion, while net profit was up by more than 73% to $2.59 billion. See the full results here.

- Ray Le Maistre, Editorial Director, TelecomTV