Broadcom seeks big cloud deal
Computer chipmaker Broadcom is looking to buy cloud computing company VMware in a US$61 billion deal.
Broadcom has announced it will acquire VMware in a cash-and-stock deal, in a deal already seen as the chipmaker's biggest and boldest bid to diversify its business into enterprise software.
The acquisition is the second biggest announced so far this year, trailing Microsoft Corp's US$68.7 billion deal to buy video game maker Activision Blizzard.
The offer of US$142.50 in cash or 0.2520 of a Broadcom share for each VMware stock represents a premium of nearly 49 per cent to the stock's last close before talks of the deal were first reported on May 22. Broadcom will also assume US$8 billion of VMware's net debt.
The announcement of the deal caused stock values of both companies to rise by over 3 per cent.
Broadcom chief Hock Tan, who built his company into one of the world's biggest chipmakers through bold and aggressive acquisitions, is now applying his approach to the software sector.
The deal will almost triple Broadcom's software-related revenue to about 45 per cent of its total sales.
It will instantly push Broadcom into the ranks of major software players, according to analyst Daniel Newman.
“Having something like VMware ... will have a significant number of doors open that their current portfolio probably doesn't open for them,” Mr Newman said.
The deal comes against the background of the Biden administration’s push for more competition.
“The Federal Trade Commission (FTC) could be concerned Broadcom will use the acquisition to potentially bundle services or raise prices,” Josh White, assistant professor of finance at Vanderbilt University, said.
“Ultimately, the FTC will want to understand if this consolidation would impact overall competition and prices, especially in this inflationary environment,” White, also a former financial economist for the Securities and Exchange Commission, said.
The agreement is a big win for Dell Technologies chief Michael Dell, who spun VMware out of the computer-maker last year.
Michael Dell owns a 40 per cent stake in VMware, while his financial backer Silver Lake owns 10 per cent. Both parties have agreed to vote in favour of the deal.
Broadcom has reportedly obtained commitments from banks for US$32 billion in debt funding.
VMware is allowed to solicit offers from rival bidders for 40 days as part of the agreement.
If VMware goes for another offer after this time lapses, it will have to pay a US$1.5 billion break-up fee to Broadcom.
However, if it goes with another offer before this period ends, a termination fee of $750 million must be paid.