Chipmaker Broadcom in talks to acquire VMware

Broadcom Inc. is in talks to acquire cloud computing company VMware Inc., people familiar with the matter say, setting up a blockbuster technology deal that would put the chipmaker in a highly specialized software space.

Discussions are ongoing and there is no guarantee they will result in a purchase, said the people, who asked not to be identified because the matter is not public. VMware currently has a market valuation of around $40 billion. Assuming a typical premium, the price of the potential transaction would be higher, although the terms considered cannot be learned.

The transaction would continue a series of acquisitions for Broadcom CEO Hock Tan, which has built one of the largest and most diverse companies in the chip industry. Software has been a major focus in recent years, with Broadcom buying CA Technologies in 2018 and Symantec Corp’s enterprise security business. in 2019.

A VMware representative declined to comment. A Broadcom representative was unavailable for comment.

In March, Tan told analysts on a post-earnings call that Broadcom had the capability for a “right-sized” acquisition.

“Investors have become increasingly focused on Broadcom’s appetite for another strategic or enterprise software platform acquisition, especially given the recent software valuation squeeze,” wrote Wells Fargo analysts after the Bloomberg News report. “A VMware acquisition would be considered to make strategic sense; consistent with Broadcom’s focus on building a thorough enterprise infrastructure software strategy.”

Broadcom manufactures a wide range of electronics, with its products ranging from iPhones to industrial equipment. But data centers have become a key source of growth, and the rise of software is giving the company more ways to target that market.

Broadcom was previously in talks to acquire SAS Institute Inc., a private software company valued between $15 billion and $20 billion. But those talks ended last year without an agreement.

Tan was also thwarted in his biggest takeover bid of them all: a bid to buy rival chipmaker Qualcomm Inc. He had to walk away from that deal in 2018 after Broadcom encountered resistance from the Trump administration. One of the concerns was Broadcom’s headquarters in Singapore, and the company has since moved its home to the United States. He is now based in San Jose, Calif., about 20 miles from VMware headquarters in Palo Alto.

VMware, founded in 1998, is a pioneering Silicon Valley company that has already changed hands several times. He invented software called virtualization, which consolidated applications and workloads onto fewer server computers by using each server to run more than one program.

But as more and more tasks moved to the cloud, VMware struggled to sustain its growth and carve out a key role for itself. The company eventually entered into a close partnership with Inc., one of the largest cloud storage and service providers.

VMware has been acquired by storage technology giant EMC Corp. in 2004. That company then sold part of its stake in VMware’s initial public offering three years later. The company transitioned to Dell Technologies Inc. when that company acquired EMC in 2016. VMware then spun off from Dell last year.

Michael Dell and private equity firm Silver Lake remain VMware’s top investors, according to data compiled by Bloomberg.

The software would help reduce Broadcom’s reliance on chips. But its previous forays into this market have not always been applauded by investors. Tan argued that he looks for companies that are “franchises” – those that have a strong market position and can be made more profitable without making huge investments.

Shares of Broadcom and VMware have both fallen around 18% this year, hurt by a broader rout. But they weren’t hit as hard as many tech stocks. The Philadelphia Stock Exchange’s semiconductor index is down 27% this year.

VMware rose 0.8% to close at $95.71 in New York on Friday, bringing its market valuation to $40.3 billion. Broadcom, down less than 1% at $543.19 on Friday, has a valuation of around $222 billion.

Chipmakers like Broadcom have seen booming sales in recent years, fueled by the spread of semiconductors into more products – as well as the need for work-from-home technology during the pandemic. But Tan warned that boom times are unlikely to last.

Even after giving an optimistic sales forecast in March, Tan said the semiconductor industry would not be able to maintain its current trajectory. He expects the chip sector to slow to historic growth rates of around 5%.

“If someone tells you otherwise, don’t believe it, because it never happened,” he said on a conference call at the time. Industry executives saying the semiconductor industry can grow at the current rate for an extended period are “dreaming,” he said.

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