FTC ‘Second Request’ Investigation Of Broadcom-VMware Deal Launches: 5 Things To Know
Broadcom told CRN in a statement that it had expected the ‘second request’ by the FTC and Justice Department due to Broadcom and VMware’s size and scale.
The Federal Trade Commission has undertaken a more stringent “second request” look at Braodcom’s proposed $61 billion acquisition of VMware, a significant regulatory hurdle that has derailed other large tech mergers.
Broadcom told CRN in a statement Thursday night that it had expected this closer look by the FTC and Justice Department given the size and scale of VMware and Broadcom.
“For a transaction of this size, a second request is common practice and not unexpected,” Broadcom said in a statement it attributed to an unnamed spokesperson. “Broadcom Inc. and VMware, Inc. intend to cooperate fully with the FTC and are confident that regulatory approval will be obtained,” according to the statement.
Broadcom wrote in regulatory filings that it notified the FTC of its agreement to acquire VMware on June 10. On July 11, Broadcom and VMware were notified that the FTC would undertake a “second request” look at the deal, a review process that halts a transaction until the review is complete, according to Broadcom’s Securities and Exchange Commission filings.
“The parties may not complete the transactions until they substantially comply with the second request and observe a second 30-calendar-day waiting period, unless the waiting period is terminated earlier, or the parties commit not to close for some additional period of time,” Broadcom wrote in an SEC filing it posted last week.
Following a second review, the FTC can either allow the deal to proceed, impose conditions on the companies, or attempt to block the deal entirely by suing in federal court.
The FTC stated in a September 2021 memo that it would widen “second request” merger investigations for larger deals, with the director of the Bureau of Competition, Holly Vedova, writing that she intended to bring “ heightened scrutiny to a broader range of relevant market realities,” calling it “core to the agency’s mission.”
“To better identify and challenge the deals that will illegally harm competition, our second requests may factor in additional facets of market competition that may be impacted,” she said. “These factors may include, for example, how a proposed merger will affect labor markets, the cross-market effects of a transaction, and how the involvement of investment firms may affect market incentives to compete.”
Broadcom is no stranger to these probes. Its merger with Qualcomm was blocked in 2018 following a second request from the FTC, which eventually sued to stop that merger on national security grounds. Earlier this year, Nvidia’s deal with British chipmaker Arm collapsed after a second review resulted in the FTC filing suit to block the deal.
What it means when a pending acquisition gets a second request from the FTC
The FTC said a second request means the deal “has raised competition issues,” which has prompted the agency to ask the parties to turn over more information so it can take a closer look at how the transaction will affect commerce.
“The vast majority of deals reviewed by the FTC and the Department of Justice are allowed to proceed after the first, preliminary review,” the FTC writes on its site describing the action. “However, if a second request is issued, the companies must provide more information.”
Vedova, a lawyer who has been with the agency since 1990, wrote on the FTC’s site that if the FTC or DOJ seeks additional information through a “second request” the deal cannot close until the agency is satisfied.
“The law forbids merging firms from consummating a transaction until the companies have substantially complied with the additional investigatory request,” she wrote.
This has this derailed previous tech mergers
Nvidia terminated its $40 billion deal to acquire British chip designer Arm, citing “significant regulatory challenges,” the chipmaker said in February of this year following a second request that resulted in the FTC suing to block the merger.
Nvidia and Arm’s owner, Japan-based SoftBank Group, said the decision was mutual, resulting from “challenges preventing the consummation of the transaction, despite good faith efforts by the parties.”
In 2018, Broadcom’s $103 billion deal for Qualcomm fell apart following a “second request” after regulatory officials who dug into the transaction cited national security concerns, owing to Broadcom’s foreign ownership. Broadcom has since relocated its corporate headquarters to the U.S.
Prior to that deal’s collapse, Broadcom told Reuters it “had anticipated the second request as a normal part of the regulatory approval process.”
Broadcom’s full statement regarding the FTC’s second request for its VMware deal
“For a transaction of this size, a second request is common practice and not unexpected. Broadcom Inc. and VMware, Inc. intend to cooperate fully with the FTC and are confident that regulatory approval will be obtained. The transaction, which is expected to be completed in Broadcom‘s fiscal year 2023, is subject to the receipt of regulatory approvals and other customary closing conditions, including approval by VMware stockholders. Broadcom continues to make progress with its various regulatory filings around the world, with that work moving ahead as expected.”
Broadcom told shareholders it cannot complete deal until it “substantially [complies] with the second request,” Broadcom wrote in a filing Oct. 3.
The FTC Will Demand Records … A Lot
The FTC puts the framework for the documentation it requires in a “second request” investigation on its website. The 25-page outline spends the first 12 pages listing the 30 types of information a company targeted by a second request investigation must supply to the FTC.
The demands may include:
“A detailed description of all statements or actions by any Person (identifying the Person by name, title, and business address) in support of, in opposition to, or otherwise expressing opinions about the Proposed Transaction or its effects.”
It also may include:
“Identify each electronic database used or maintained by the Company in connection with any Relevant Product [Service] at any time after January 1, [Yr-3], that contains information concerning the Company’s (i) products [services] and product codes; (ii) facilities; (iii) production; (iv) shipments; (v) bids or sales proposals; (vi) sales; (vii) prices; (viii) margins; (ix) costs, including but not limited to production costs, distribution costs, standard costs, expected costs, and opportunity costs; (x) patents or other intellectual property; (xi) research or development projects; or (xii) customers.”
However, Bureau of Competition Director Vedova said in a memo on the FTC’s site that regulators will work with companies to streamline the process.
“When the FTC issues a second request, FTC staff typically engage in negotiations (sometimes quite extensive) with merging companies to tailor the scope of search to meet the specific needs of our investigation, and to consider modifications requested by the companies under investigation,” she wrote.
What’s next for the Broadcom-VMware deal?
Broadcom last week send a lengthy FAQ to VMware shareholders, presenting them with information about the deal.
VMware owners are expected to vote on the proposed merger on Nov. 4 at a special election of shareholders.