Opinion: Broadcom will let VMware find another buyer, but is any other software company interested?

Virtualization software maker VMware Inc. on Thursday agreed to be acquired by Broadcom Inc. in a roughly $61 billion deal that will triple the chipmaker’s software business and has a customary stipulation allowing VMware to, after a to look for other buyers.

The deal’s unusual go-shop stipulation raises the question of whether software vendors that may be a better fit for VMware want to top Broadcom’s offering.

On Thursday shares of VMware VMW,
up 3% but still closed nearly 13% below Broadcom’s AVGO,
Price of $142.50 per share. VMware shareholders have an option to receive $142.50 in cash per share or 0.2520 Broadcom shares for every VMware share, an option that longtime investors like Dell Technologies DELL may prefer.
Founder Michael Dell, who owns approximately 40% of VMware, for income tax purposes.

The deal was signed by the boards of both companies pending a final shareholder vote. Founded in 1998 by entrepreneur Diane Greene, her husband Mel Rosenblum and three others, VMware was one of the pioneers of the concept of virtualization, which allows different operating systems to run simultaneously on the same hardware as if they were all running on their own machine.

In the pre-cloud era, VMware was one of the hottest software stocks because it was a critical piece of infrastructure for many companies. But even today, the majority of its business is still on-premises data center software. It’s transitioned to more revenue from the cloud or software-as-a-service, but Bernstein Research analyst Mark Moerdler noted that about 25% of revenue in fiscal 2022 is expected to come from subscriptions. In a report released earlier this year, he also noted that VMware stock took an “unfair hit” when it was spun off from Dell in November.

A Broadcom acquisition isn’t exactly a huge endorsement of VMware’s cloud-based future. The addition of VMware to Broadcom’s software offering, the company said in a regulatory filing, would “provide enterprise customers with an expanded platform of critical infrastructure solutions to accelerate innovation and meet the most complex IT infrastructure needs.”

Broadcom has made a habit of buying up older, forgotten software companies and using private equity tactics to clean up and make them more efficient. Broadcom’s first foray into the software industry was when it bought CA Inc., best known for its mainframe software, in 2018.

From 2018: Read more about Broadcom CEO Hock Tan’s acquisition of CA Inc.

However, Cowen & Co. analyst Matthew Ramsay believes the deal would be a major coup for Broadcom. “VMware’s hybrid cloud infrastructure software is the foundation for an extremely broad customer base, deepening Broadcom’s hook and providing the ability to leverage its sales force to cross-sell its other software portfolios,” he wrote in a note. “VMware’s software is both critical and sticky — it aligns with Broadcom’s software M&A goals, only on a broader and larger scale.”

But other software companies may be a better match for VMware, and VMware has 40 days to find a better deal on its own. The point of the so-called go-shop provision, said an investment banker who wasn’t involved in the transaction, is to give the seller a chance to find another buyer, and there would be a break-up fee if VMware should actually take action should find another buyer. This tactic is most commonly used in private equity deals, and it could be argued that Broadcom is becoming a combination tech conglomerate and private equity firm.

“We believe other infrastructure software companies and/or companies with cloud platform ambitions may be interested in acquiring VMW,” Bernsteins Moerdler wrote earlier Thursday, listing a few companies that would be viable candidates. “Potential buyers (other than private equity) are likely to be limited to very large enterprise software companies (e.g., Cisco CSCO,
— not covered) or a large hyperscale cloud provider such as Microsoft MSFT,
Amazon AMZN,
or Google GOOG,

or an emerging hyperscale cloud provider like Oracle ORCL,
Some may also recall that Greene, co-founder of VMware, served three years as CEO of Google Cloud and seven years on Alphabet’s board of directors.

Moerdler added that Microsoft may have too many overlapping solutions and face regulatory hurdles, and that Oracle, which may see an even greater benefit than the others, given the price and its own recent deal to buy Cerner Corp. CERN probably wouldn’t buy it.
for $28.3 billion.

Given VMware’s credibility in Silicon Valley and its former status as a once-hot company, it’ll be interesting to see if it actually tries to buy itself in and find a better partner. Ironically, in a Q&A in a recent filing with the Securities and Exchange Commission, The companies asked a question: “Q. Broadcom has a very different corporate culture than VMware, and their management team seems more like financial engineers than operators. Why would I sign up for that type of culture?”

VMware and Broadcom have announced they will work together to foster a culture that inspires and engages their communities.

But it’s possible this latest Silicon Valley saga hasn’t reached its finale yet. Opinion: Broadcom will let VMware find another buyer, but is any other software company interested?

Brian Lowry

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