Broadcom’s biggest bet
The chipmaker is lining up a $50bn bid for virtualisation software firm VMware, but it may have to pay more. Matthew Partridge reports
One of the biggest tech deals in history is on the verge of being announced, with chipmaker Broadcom in talks to buy cloud-computing company VMware for around $50bn, says James Titcomb in the Daily Telegraph. The takeover of VMware – whose core product allows users to access remote versions of systems such as Windows – would be the latest in a string of acquisitions that have made Broadcom into one of the world’s largest technology companies.
Broadcom has a mixed record on completing deals, says Dan Gallagher in The Wall Street Journal. US authorities scuppered its takeover of rival chipmaker Qualcomm in 2018, while its recent attempt to buy SAS Institute also fell victim to a “revolt” by employees worried about the potential loss of perks. However, it is likely to face less opposition this time. “Software companies can’t afford to be as picky now that valuations have tumbled hard in the wake of the market’s broad sell-off”, while the “steady growth” of Broadcom’s free cash flow gives it extra firepower.
It’s all down to Dell
The chance of rival offers may encourage VMware to hold out for a higher price, says Giles Turner on Bloomberg. Analysts suggest that other bidders who want to expand their software offering could be interested, such as Cisco. Billionaire Michael Dell is also likely to have a substantial say on whether the deal goes ahead. Dell owns around 40% of VMware, after the latter was bought by and later spun off from Dell Technologies, the company that he founded. He “isn’t shy about getting into a corporate fight” and it’s not clear whether an offer of around $50bn would be enough for him – VMware’s market cap touched $70bn as recently as October.
If the takeover ends up going ahead, Dell seems likely to retain some stake in the company, since the size of the deal means that Broadcom will probably have to offer its own shares as part of any deal, says Lex in the Financial Times. This may not be too hard a sell. Broadcom’s shares have risen 82% over the past two years, well ahead of the S&P 500, helping to give CEO Hock Tan credibility for his “biggest gambit yet” as he transforms what began as a semiconductor firm into “a stable of mature software stars with mediocre growth but impressive cash generation”.
A one-sided deal
Still, while the deal could be good for Dell and the other VMware shareholders, it “doesn’t look very appealing for Broadcom’s investors”, says Jonathan Guildford for Breakingviews. Tan will need to “cut costs dramatically” in order to make it pay, but “there might not be much room to push”. VMware’s operating margins of 22% are comparable to peers such as Cisco Systems, or to Red Hat prior to its acquisition by IBM. With few “meaningful commonalities” between what is still mainly a chip business and a software firm, this tie-up could end up “bolstering the longerterm argument for breaking Broadcom up”.