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May 26 (Reuters) – Broadcom Inc (AVGO.O) said on Thursday it would acquire cloud computing company VMware Inc (VMW.N) in a $61 billion cash and stock deal , the chipmaker’s biggest and boldest bid to diversify into enterprise software.
The acquisition is the second largest announced globally so far this year, after just Microsoft Corp’s (MSFT.O) $68.7 billion deal to buy video game maker Activision Blizzard Inc ( ATVI.O).
The $142.50 cash offer or 0.2520 of a Broadcom share for each VMware share represents a nearly 49% premium to the stock’s last close before deal talks erupted. be announced for the first time on May 22. Broadcom will also assume $8 billion of VMware’s net debt. .
Shares of the chipmaker closed up 3.5% and VMware 3.1%.
Broadcom chief executive Hock Tan, who made his company one of the world’s largest chipmakers through acquisitions, is now bringing his trading playbook to the software industry.
In one fell swoop, the deal will nearly triple Broadcom’s software revenue to about 45% of its total sales.
Broadcom will be instantly validated as a major software player with the acquisition of VMware, said Daniel Newman, analyst at Futurum Research.
“Having something like VMware…will open a significant number of doors that their current portfolio probably isn’t opening for them,” Newman added.
The deal comes at a time when the Biden administration is pushing for more competition in every sector from agriculture to tech.
“The Federal Trade Commission (FTC) may be concerned Broadcom is using the acquisition to potentially bundle services or raise prices,” said Josh White, an assistant professor of finance at Vanderbilt University.
“Ultimately, the FTC will want to understand whether this consolidation would impact overall competition and pricing, especially in this inflationary environment,” said White, also a former financial economist for the Securities and Exchange Commission.
The deal is also a coup for Dell Technologies Inc (DELL.N) chief executive Michael Dell, who spun off VMware from the computer maker last year.
Michael Dell owns a 40% stake in VMware, while his backer Silver Lake, a private equity firm, owns 10%. They both agreed to vote in favor of the deal.
Broadcom has already secured commitments from a consortium of banks for $32 billion in debt financing. VMware, which said the bid was unsolicited, will be allowed to solicit bids from competing bidders for 40 days as part of the deal.
If VMware chooses another offer after this deadline, the company will have to pay $1.5 billion to Broadcom as severance pay.
However, if he decides to choose another offer before the end of this period, a termination fee of $750 million will have to be paid.
The two companies also released quarterly results, with Broadcom predicting 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.
Broadcom’s pivot to software began after its bid to acquire mobile chip giant Qualcomm Inc (QCOM.O) was blocked by former US President Donald Trump in 2018 on national security grounds.
Since then, Broadcom has taken over enterprise software company CA Technologies Inc for $18.9 billion and acquired the security division of Symantec Corp for $10.7 billion. It also explored acquiring analytics software company SAS Institute Inc, but did not make a bid.
Broadcom then reduced the costs of the acquired companies. He cut the sales and marketing budgets of the CA and Symantec companies from about 29% of their revenue to 7%.
VMware dominates the market for so-called virtualization software, which allows enterprise customers to run multiple applications on their servers.
This activity has begun to slow as companies find new tools to operate through cloud computing, prompting VMware to seek new offerings, including through a partnership with Amazon.com Inc (AMZN.O).
Broadcom doesn’t usually spend a lot on research and development, said Keith Townsend, an analyst at consultancy CTO Advisor.
That could bode badly for new product launches at VMware, said Townsend, who also had a brief stint at VMware as an enterprise data center architect.
“When I talk to customers, they desperately need innovation from companies like VMware.”
Reporting by Chavi Mehta in Bengaluru, Krystal Hu in New York and Jane Lanhee Lee in San Francisco; Additional reporting by Eva Mathews; Written by Sweta Singh; Editing by Aditya Soni and Shounak Dasgupta
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