Broadcom Inc said on Thursday it will acquire cloud computing company VMware Inc in a $61 billion cash-and stock deal, the chipmaker's biggest and boldest bid to diversify its business into enterprise software.
The acquisition is the second biggest announced globally so far this year, trailing only Microsoft Corp's $68.7 billion deal to buy video game maker Activision Blizzard Inc.
The offer of $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 $8 billion of VMware's net debt.
The chipmaker's shares closed up 3.5 per cent and VMware rose 3.1 per cent.
Broadcom Chief Executive Hock Tan, who built his company into one of the world's biggest chipmakers through acquisitions, is now bringing his dealmaking playbook to the software sector.
In one fell swoop, the deal will almost triple Broadcom's software-related revenue to about 45 per cent of its total sales.
Broadcom will instantly be validated as a major software player with the acquisition of VMware, Futurum Research analyst Daniel Newman said.
"Having something like VMware ... will have a significant number of doors open that their current portfolio probably doesn't open for them," Newman added.
The deal comes at a time when there is an increased push by the Biden administration for more competition in all sectors ranging from agriculture to technology.
"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 also a coup for Dell Technologies Inc Chief Executive 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, a private equity firm, owns 10 per cent. They have both agreed to vote in favor of the deal.
Broadcom has already got commitments from a consortium of banks for $32 billion in debt funding. VMware, which said the offer was unsolicited, will be allowed to solicit offers from rival bidders for 40 days as part of the agreement.
If VMware picks another offer after this time lapses, the firm will have to pay Broadcom $1.5 billion as break-up fee.
However, if it decides to pick another offer before this period ends, a termination fee of $750 million must be paid.
Both the companies also reported quarterly results, with Broadcom forecasting better-than-expected revenue for the third quarter, while VMware suspended its full-year outlook due to the pending acquisition.
Broadcom's board also authorized a new share repurchase program of up to $10 billion.
BID TO DIVERSIFY
Broadcom's pivot into software started after its attempt to acquire mobile chip giant Qualcomm Inc was blocked by former U.S. President Donald Trump in 2018 on national security grounds.
Since then Broadcom took over business software firm CA Technologies Inc for $18.9 billion and acquired Symantec Corp's security division for $10.7 billion. It also explored acquiring analytical software company SAS Institute Inc, but did not proceed with a bid.
Broadcom then went on to slash costs at the acquired businesses. It cut the sales and marketing budgets of the CA and Symantec businesses from about 29 per cent of their revenue to 7 per cent.
VMware is dominant in the so-called virtualization software market, that allows corporate customers to run multiple applications on their servers.
This business has started to slow as companies have found new tools to operate through cloud computing, pushing VMware to seek new offerings, including through a partnership with Amazon.com Inc.
Broadcom doesn't have a track record of spending big on research and development, Keith Townsend, analyst at advisory firm CTO Advisor, said.
This could bode poorly for the launch of new products at VMware, Townsend, who also had a brief stint with VMware as an enterprise data center architect, said.
"As I talk to customers, they're in desperate need for innovation from companies like VMware."
(Graphics: https://graphics.reuters.com/BROADCOM-STOCKS/gdvzyebrlpw/Pastedper cent20imageper cent201653572246311.png)