Broadcom CEO Hock Tan’s Guide To Buying VMware In 30 Days
CRN takes you behind the scenes for a month of late-night meetings, phone calls, and the two conversations Michael Dell had at Davos that became footnotes to one the largest software deals of all time once it closes.
As Broadcom’s $61 billion bid for VMware inches towards a finish line of sometime next year, more details are emerging about the deal, including the other companies who were interested in the virtualization giant, VMware’s counter offer, which CEO Hock Tan refused, and the conversations Michael Dell had at Davos that played a part in creating the mega offer.
Broadcom filed a 309-page document with the U.S. Securities and Exchange Commission that laid out its rationale to shareholders for buying VMware. Included in the lengthy July text was day-by-day rehashing of the significant meetings and events, numerical figures and estimates, that played a role in shaping the deal.
According to this SEC filing, at least two companies other than Broadcom were interested in buying VMware during the go-shop period. Leaders at two separate companies also spoke with Michael Dell at Davos as negotiations between Broadcom and VMware intensified in mid-May.
The filing also gives the public a glimpse of the expected timeline of the deal. Broadcom initially wanted it to close within 15-months, however VMware asked for the longer 18-month window during negotiations. Broadcom has since repeatedly said the deal would close by October 31, 2023, about 18 months after it was announced.
During the days Broadcom negotiated with VMware over value, VMware disclosed its revenue projections for the next five years, out to 2027, estimating that it would grow from $13.35 billion in sales by the end of this fiscal year, to $18.93 billion by the end of 2027, according to the SEC filing.
VMware said it will achieve those numbers “fueled by subscription and SaaS revenue” which it plans to increase “from 26% to 37% in fiscal years 2023 through 2025, so that it accounts for 46% of the overall revenue mix in fiscal year 2025, the filing stated.
The moves would be in keeping with Broadcom’s goals for VMware, as Tan has said he too plans to quickly increase subscription revenue at VMware, once the deal closes.
Here is the account of how the deal came together, as stated by Broadcom in its July filing:
Dell Technologies CEO Michael Dell
Assistant to Assistant
On April 26, Hock Tan’s assistant called Michael Dell’s assistant to make an appointment.
What followed was a fast-paced month of meetings, phone calls, offers, and counter-offers that launched the merger of Broadcom and VMware.
Tan, the CEO of Broadcom, wanted to talk with Michael Dell, CEO of Dell Technologies, the largest single shareholder of VMware and president of VMware’s board, but Tan wouldn’t say what the meeting was about.
The two CEOs agreed to meet on Friday, May 6, the day after Dell Technologies World ended in Las Vegas.
“At the May 6 meeting, Mr. Tan told Mr. Dell that Broadcom would be interested in a potential combination with VMware on a friendly basis. Mr. Tan and Mr. Dell discussed Broadcom’s strategic rationale with respect to such a transaction, but did not discuss the price or any other terms of a potential transaction,” according to a filing with the SEC.
During their conversation, Dell suggested Tan speak with Egon Durban, a VMware board member, who is also co-CEO at Silver Lake, one of the nation’s largest private equity firms. Until 2019, Silver Lake had been an investor in Broadcom. Besides Dell, SilverLake has the largest stake in VMware at 10 percent.
Then, immediately after the meeting Dell called board member Paul Sagan, the lead independent director of VMware, to tell him about Tan’s proposal. Sagan, a former television news writer and director, has been a board member of VMware since 2015.
The next day, Tan was on the phone with Durban and by Thursday Tan had brought together Broadcom executives, Durban, and Silver Lake executives to talk about a potential merger.
On Friday, a week after Tan’s first meeting with Dell, Broadcom sent a confidential letter to “Messrs. Dell, Durban and Sagan” suggesting a purchase price of $142.50 per share, with shareholders selecting either cash or equivalent shares of Broadcom.
Additionally, Broadcom offered a board seat to VMware upon close of the deal, and a “go-shop” provision, but said it wanted to sign an agreement quickly, by May 26, the date of VMware’s next earnings call.
VMware’s board formed a transaction committee with Dell, Durban, Sagan and Karen E. Dykstra that got early glimpses of Broadcom’s first quarter performance, as well as its own, and, then on May 21, hatched a counter offer.
“The VMware board of directors then discussed a potential counterproposal to Broadcom, including an increase in headline price from $142.50 to $150 per share, an increase in exchange ratio (stock equivalent) from 0.242 to 0.2602 shares of Broadcom for one share of VMware, increasing the amount of Broadcom stock used from 50 percent of the financing to 60 percent, extending the timeline from 15 months to 18 months, and extending the “go-shop” provision from 35 days to 40 days,” an SEC filing stated.
Durban went to Tan that day to discuss the board’s proposal. Tan refused the price hike, telling Durban that $142.50 was Broadcom’s best and final offer. The “go-shop” provision was set at 40 days when the deal was announced, indicating VMware won some of the negotiations.
However, “Broadcom was unwilling to increase the maximum amount of stock consideration to be issued by Broadcom to VMware stockholders in the proposed transaction,” the filing stated.
Davos, “Party A” and “Party B”
The next day Sunday, May 22, VMware’s transaction committee met with the full VMware board, J.P. Morgan Chase, Goldman Sachs, Silver Lake, and lawyers from Gibson Dunn to talk about Broadcom’s final offer.
Missing from that meeting was Michael Dell, who was in Davos at the World Economic Forum.
In the meeting, Durban said another CEO who was also in Davos had reached out to speak with Dell without specifying a topic, similar to how Tan had broached a merger with VMware when he spoke with Dell.
On May 22, the opening day of the World Economic Forum, Bloomberg reported that Broadcom and VMware were expected to soon announce a merger agreement. This was followed by several other reports, including CRN’s, in which partners pleaded with Broadcom not to “Screw VMware Up.”
Meanwhile in Davos, Dell and the CEO -- called “Party A” in SEC filings -- had a chat.
“During the meeting, the Chief Executive Officer of Party A asked Mr. Dell if Mr. Dell could comment on the rumors that VMware was in discussions regarding a potential transaction, to which Mr. Dell said he had no comment. The Chief Executive Officer of Party A did not make any offer or proposal regarding a potential strategic combination between Party A and VMware.”
Two days later, VMware CEO Raghu Raghuram said he was approached by another company, which might be interested in buying VMware.
“Raghuram noted that a senior executive of a large publicly traded corporation (referred to as Party B) had reached out following the news reports regarding a potential Broadcom transaction and expressed interest in a potential transaction,” the filing stated.
However, Dell countered that.
He told those assembled that he had interacted with a senior executive of “Party B” in Davos the day prior. Dell said the executive did not mention anything regarding a potential transaction.
Bloomberg, which sent a reporter to cover the World Economic Forum, reported that it saw Dell at the event. It also reported that Salesforce CEO Mark Benioff was in Davos.
Broadcom Software Group President Tom Krause
Early in the morning on May 26, one month to the day after Tan’s assistant had called Dell’s assistant to set up a meeting, the VMware Board of Directors voted unanimously to approve the deal and recommended that shareholder do the same.
“Before the opening of New York Stock Exchange … Broadcom delivered to VMware fully executed versions of the debt commitment letter and Gibson Dunn delivered the legal opinion required by the tax matters agreement between VMware and Dell for VMware to engage in the transactions contemplated by the merger agreement. Promptly following execution of the merger agreement, VMware and Broadcom publicly announced the merger agreement.”
Tan, along with then-Broadcom Software Group President Tom Krause, held a call with investors and talked about the opportunities Broadcom saw with VMware, including a chance to “embrace the channel.”
The ink was hardly dry on the deal when JP Morgan Chase and Goldman Sachs started calling other potential suitors for VMware on May 26, according Broadcom’s filings.
“J.P. Morgan and Goldman Sachs contacted 10 potential strategic acquirors (including Party A and Party B).,” the filing stated. “Of such contacted parties, two potential strategic acquirors executed acceptable confidentiality agreements. During the go-shop period, VMware provided confidential information in response to due diligence inquiries made by these two potential strategic acquirors.”
As the 40-day window ticked down however, and the interested company’s dug into VMware’s financials, none of those prospects returned with an offer. The go-shop provision closed on July 5, with Broadcom emerging as the only deal on the table.