Broadcom Corporation, the American company that develops semiconductors used in various telecommunications equipment, announced the acquisition of VMwarean IT company that offers several proprietary products related to the virtualization of x86 architectures, for $61 billion in cash and stock.
VMware dominates the market for so-called virtualization software, which allows business customers to run multiple applications on their servers. This activity began to wane as companies found new tools to operate through cloud computing, prompting VMware to look for new offerings, including through a partnership with Amazon.
Broadcom’s switch to software began after its bid to acquire mobile chip giant Qualcomm was blocked by former US President Donald Trump in 2018 on national security grounds. The acquisition is the second largest announced globally so far this year, just behind Microsoft’s $68.7 billion deal to buy video game maker Activision Blizzard.
The offer of $142.50 in cash or 0.2520 Broadcom shares for each VMware share represents a nearly 49% premium over the last close of the stock before deal talks were first reported. on May 22. Broadcom will also assume $8 billion of VMware’s net debt.
The chipmaker’s shares closed up 3.5% and VMware’s 3.1%. Broadcom CEO, Hock Tan, who built his company into one of the largest microchip manufacturers of the world through acquisitions, now he is applying his business method to the software sector.
By just one hit, the deal will nearly triple Broadcom’s software revenue, which will represent around 45% of their total sales. According to Daniel Newman, an analyst at Futurum Research, with the acquisition of VMware, Broadcom will be instantly recognized as a major player in the software industry.
“Having something like VMware … will open up a significant number of doors that your current portfolio probably won’t open for you,” Newman added. The deal comes at a time when the Biden administration is pushing for more competition in everything from agriculture to technology.
Broadcom has already obtained commitments from a consortium of banks for $32 billion in debt financing. VMware, which said the offer was unsolicited, will be allowed to solicit bids from rival bidders for 40 days as part of the deal. If VMware chooses another offer after that time has elapsed, the company will have to pay Broadcom $1.5 billion in severance pay. On the other hand, if you decide to opt for another offer before the end of this period, you will have to pay compensation of 750 million dollars.
The two companies also released their quarterly results, with Broadcom forecasting better-than-expected third-quarter revenue, while VMware suspended its full-year outlook due to the pending acquisition. Broadcom’s board also authorized a new share buyback program of up to $10 billion.
Miguel dellChairman of the Board of Directors of VMware, said:
“Together with Broadcom, VMware will be even better positioned to deliver valuable and innovative solutions to even more of the world’s largest companies. This is a historic moment for vmware, and it gives our shareholders and employees the opportunity to participate in a significant advantage.”
Broadcom has since bought enterprise software company CA Technologies for $18.9 billion and acquired Symantec Corp’s security division for $10.7 billion. It also explored acquiring analytics software company SAS Institute Inc, but did not follow up on a bid. Broadcom then reduced the costs of the acquired companies.
The transaction is expected to add approximately $8.5 billion of the acquisition’s pro forma EBITDA within three years of closing. Pro forma for each company’s fiscal year 2021, software revenue is expected to represent approximately 49% of Broadcom’s total revenue.
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