Broadcom’s $61B Buy Of ‘Iconic’ VMware: 5 Big Things To Know
From what Dell CEO Michael Dell has to say to a ‘go-shop’ provision in the deal allowing VMware to look for other suitors, here are the five biggest things to know about Broadcom’s historic $61 billion move to acquire VMware.
From Michael Dell To Details Of The $61 Billion Acquisition, Here Are Five Big Things To Know
The IT landscape is being shaken up in one of the largest technology acquisitions in history as Broadcom is set to acquire virtualization pioneer and enterprise software superstar VMware for a whopping $61 billion.
Broadcom President and CEO Hock Tan said the acquisition of the “iconic” company will take his company to new heights with the Broadcom Software Group being rebranded and operated as VMware, which will incorporate Broadcom’s existing infrastructure and security software offerings.
“Building upon our proven track record of successful M&A, this transaction combines our leading semiconductor and infrastructure software businesses with an iconic pioneer and innovator in enterprise software as we reimagine what we can deliver to customers as a leading infrastructure technology company,” said Tan in a statement.
VMware CEO Raghu Raghuram said the company, which he first joined in 2003, has been “reshaping the IT landscape” for the past 24 years by enabling its hundreds of thousands of customers to become digital businesses.
“We stand for innovation and unwavering support of our customers and their most important business operations and now we are extending our commitment to exceptional service and innovation by becoming the new software platform for Broadcom,” said Raghuram in a statement.
Raghuram said combining the assets of Palo Alto, Calif.-based VMware and San Jose, Calif.-based Broadcom, all housed under the VMware brand, will create a “remarkable enterprise software player.”
“Collectively, we will deliver even more choice, value and innovation to customers, enabling them to thrive in this increasingly complex multi-cloud era,” said VMware’s CEO.
In connection with the upcoming $61 billion deal, Broadcom was able to obtain commitments from a consortium of banks for $32 billion in new, fully committed debt financing. Broadcom said it expects to maintain its current dividend policy of delivering 50 percent of its prior fiscal year free cash flow to shareholders.
In addition, Broadcom said it expects to maintain an investment grade rating, given its strong cash flow generation.
“We look forward to VMware’s talented team joining Broadcom, further cultivating a shared culture of innovation and driving even greater value for our combined stakeholders, including both sets of shareholders,” said Broadcom’s CEO.
Michael Dell: ‘This Is A Landmark Moment’
Dell Technologies Chairman and CEO Michael Dell is currently the largest shareholder of VMware with a 40 percent stake in the company, while Dell is also VMware’s chairman of the board. Dell likely had a significant say in the deal.
Michael Dell released a statement Thursday supporting the merger.
“Together with Broadcom, VMware will be even better positioned to deliver valuable, innovative solutions to even more of the world’s largest enterprises,” said Dell, whose company spun off VMware in November 2021. “This is a landmark moment for VMware and provides our shareholders and employees with the opportunity to participate in meaningful upside.”
Michael Dell owns 40.2 percent shares of VMware, while Dell’s investment partner and private equity firm, Silver Lake, owns approximately 10 percent share in VMware.
Both Michael Dell and Silver Lake have signed support agreements to vote in favor of the transaction as long as the VMware board of directors continues to recommend the proposed transaction with Broadcom.
The deal is expected to be completed in Broadcom’s current fiscal year 2023.
The Takeaway: Michael Dell gave his approval of the acquisition, which means the deal is likely a lock.
Details Of The Deal
Broadcom will acquire all of the outstanding shares of VMware in a cash-and-stock transaction that values VMware at approximately $61 billion, based on the closing price of Broadcom common stock on May 25, 2022.
The deal has been unanimously approved by the boards of directors of both companies. Broadcom will assume $8 billion of VMware’s net debt.
The transaction is expected to add approximately $8.5 billion of pro forma EBITDA from the acquisition within three years post-closing.
Under the terms of the agreement, VMware shareholders will elect to receive either $142.50 in cash or 0.2520 shares of Broadcom common stock for each VMware share.
The shareholder election will be subject to proration, resulting in approximately 50 percent of VMware’s shares being exchanged for cash consideration and 50 percent being exchanged for Broadcom common stock.
Based on the closing price of Broadcom common stock on May 25, 2022, the total $138.23 per-share consideration represents a 44 percent premium to the closing price of VMware common stock on May 20, 2022—the last trading day prior to various media outlets reporting on the deal—and a 32 percent premium to VMware’s unaffected 30-day volume weighted average price.
Upon closing of the transaction, current Broadcom shareholders will own approximately 88 percent and current VMware shareholders will own approximately 12 percent of the combined company on a fully diluted basis.
The transaction is subject to the receipt of regulatory approvals and other customary closing conditions, including approval by VMware shareholders.
Following the closing of the transaction, the Broadcom Software Group will rebrand and operate as VMware, incorporating Broadcom’s existing infrastructure and security software offerings as part of an expanded VMware portfolio.
The Takeaway: With both boards of directors approving the deal and Broadcom making the correct financial move to make the deal, it is highly likely the transaction will be completed either in the summer or fall of 2022.
The Technology Synergy Plan To Build ‘The Next Generation Of Infrastructure Software’
Both companies said by integrating Broadcom’s software portfolio with VMware, the combined company will offer enterprises an expanded platform of critical infrastructure solutions to accelerate innovation and address the most complex IT infrastructure needs.
“VMware’s platform and Broadcom’s infrastructure software solutions address different but important enterprise needs, and the combined company will be able to serve them more effectively and securely,” said Tom Krause, president of the Broadcom Software Group, in a statement. “VMware has long been recognized for its enterprise software leadership, and through this transaction we will provide customers worldwide with the next generation of infrastructure software.”
The combined company aims to provide all businesses across all verticals with greater choice and flexibility to build, run, manage, connect and protect applications at scale across distributed environments, regardless of where they run—from the data center, to any cloud and to edge computing.
With the combined company’s shared focus on technology innovation and significant research and development expenditures, Broadcom will deliver compelling benefits for customers and partners.
Broadcom is a global technology leader that designs, develops and supplies semiconductor and infrastructure software solutions. VMware is a leading provider of multi-cloud services for all applications, while it was a pioneer in virtualization that transformed x86 server-based computing.
VMware’s multi-cloud portfolio today spans application modernization, cloud management, cloud infrastructure, networking, security and anywhere workspaces. The company helps some of the largest and most dynamic enterprises to build, run, manage, connect and protect their most important and complex workloads for the benefit of their customers.
Pro forma for each company’s fiscal year 2021, software revenue is expected to account for approximately 49 percent of Broadcom’s total revenue, according to Broadcom.
The Takeaway: Broadcom is looking to win market share and attack the enterprise software market with VMware as the tip of the spear.
It is key to note that the acquisition agreement as it now stands provides for a “go-shop” provision.
This provision allows VMware and its board of directors to 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.
Both companies said in a statement that, “There can be no assurance this process will result in a superior proposal.”
VMware does not intend to disclose developments about this process unless and until its board of directors has made a decision with respect to any potential superior proposal.
The Takeaway: VMware will be able to shop around for better acquisition offers or new potential suitors until July 5.
VMware And Broadcom Financial Results
In a unique move, both VMware and Broadcom reported their quarterly earnings financial results Thursday.
Broadcom generated total sales of $8.1 billion for its second fiscal quarter 2022, representing a 23 percent increase in revenue year over year. The $8.1 billion in sales represents a record quarter for the company.
“Consolidated revenue grew 23 percent year over year to a record $8.1 billion, and operating profit increased 30 percent,” said Broadcom CFO Kirsten Spears, in a statement. “We generated $4.2 billion in free cash flow and are expecting free cash flow to remain strong in the third quarter.”
Broadcom said it is expecting third fiscal quarter revenue of $8.4 billion, which would represent an increase of 24 percent compared with third-quarter 2021.
On the VMware front, the company generated $3.09 billion in revenue during its first fiscal quarter, an increase of 3 percent year over year. VMware’s subscription and SaaS revenue for the first quarter was $899 million, an increase of 21 percent compared with the same quarter one year ago.
“We are focused on accelerating growth of our subscription and SaaS portfolio as we provide customers the flexibility and choice they seek,” said VMware CEO Raghu Raghuram in a statement. “In this multi-cloud environment, we are committed to delivering a comprehensive technology platform spanning critical customer requirements for our hundreds of thousands of customers who trust our software as the foundation for their most critical applications.”
Due to VMware’s pending acquisition by Broadcom, VMware said it would not be providing financial guidance for its current second fiscal quarter.
The Takeaway: Both VMware and Broadcom made a statement by reporting their quarterly financial earning results at the exact same time. Unless VMware finds another buyer before July 5, it appears the company is set to become part of Broadcom.