Broadcom's (SASE) play for VMware
The microchip giant Broadcom (market cap $242 billion) has offered to acquire VMware (market cap around $55 billion), the leading maker of server virtualization software, in a deal worth $61 billion in cash and stock, the third largest in tech industry’s history after Dell’s $67 billion acquisition of data storage company EMC that included a play for VMware and Microsoft’s takeover of Activision Blizzard for $68.7 billion that hasn’t even closed yet.
In other words: it’s that big.
The global microchip maker has more than enough market cap and free cash flow to make the whole thing work out just fine, that is: for investors. But can it work for its user base, too?
Broadcom’s previous track record gives many VMware users goose bumps.
The industry has seen quite a few acquisitions by Broadcom before. They all seem to follow a similar pattern.
To hell with innovation. Wait, what?
Broadcom’s real specialty: generating cash with healthy margins.
Broadcom didn’t grow organically into the industry giant it is today, but through aggressive M&A’s. For most of its acquisitions, it was the kiss of death.
Take for example Brocade Communications Systems, a once storied, high-profile maker of classy network gear. Broadcom snatched it for a paltry $5.9B in 2016. Today, it lingers around the balance sheet of its parent somewhere between the likes of Emulex and LSI.
The company snatched CA Technologies in 2018 for $19 billion and went on to buy Symantec in 2019 for another $10.7 billion.
Some of these were followed by massive price hikes, dwindling support, and stalled development. Under Broadcom’s ownership, Symantec slammed on the brakes in all things innovation.
Now that the shortage of microchips is being exacerbated by continuous Chinese lockdowns Broadcom’s foray into software is beginning to look inevitable.
With the acquisition of VMware, Broadcom would decouple some more of its cash flow from supply chain jitters. But more importantly, it would allow the combined business to realize long-sought after synergies by combining its semiconductors manufacturing prowess with Symantec’s cyber security expertise and CA’s automation.
“Combining our assets and talented team with Broadcom’s existing enterprise software portfolio, all housed under the VMware brand, creates a remarkable enterprise software player,”
said Raghu Raghuram, VMware’s CEO, in a prepared statement.
“Collectively, we will deliver even more choice, value and innovation to customers, enabling them to thrive in this increasingly complex multi-cloud era.”
About them innovations… VMware users’ aren’t buying the promise – at least not yet. Neither are some leading analysts.
„A Broadcom acquisition sparks fear of price hikes, diminished support, and stunted innovation,“ writes Forrester’s Tracy Woo, Senior Analyst serving Infrastructure and Operations professionals.
Broadcom is undeterred.
Here’s another one: „Broadcom’s acquisition strategy in the past does not showcase an innovation-focused mindset,” argues Naveen Chhabra, another Senior Analyst at Forrester.
Then there is this: After Cumulus was gobbled up by NVIDIA, who also happens to own Broadcom’s competitor Mellanox, the relationship between Cumulus and Broadcom soured to the point that the former dropped support for Broadcom silicon after the latter one reportedly revoked access to its technology.
Now Broadcom is again trying to lessen its reliance on its traditional semiconductor business to include infrastructure and enterprise software. So far, there is nothing wrong with that. Except, perhaps, the notion that the VMware ecosystem is unlikely to take price hikes without pushback.
This time, they will have to deliver something.
Not on cloud nine
VMware has problems of its own, chief among them high prices and competition from open source alternatives, some of which cost close to nothing if migration is not an issue.
Many legacy applications are vendor-locked in VMware, running in VMs. Migrating them to Proxmox or Nutanix, or even IBM system i or Joyent, or Microsoft Hyper V or KVM or some other hypervisor is not always viable. There is also the container space, from Docker through LXC/LXD to Kubernetes with Terraform, Ansible and so on. Bare metal alternatives abound as well, but they tend to require new skill sets and new risks.
This is the ultimate frontier when it comes to vendor lock-in: the good old fashioned skill set. Users of VMware are not likely to want to part ways with theirs. They may want to stick around and ride it out. They are justified in feeling uneasy.
If Broadcom mean what they said, it is not all bad news to the industry. Quite to the contrary.
The secret sauce of SASE hybridization
The merged enterprise could just about have assembled all the ingredients needed for the ultimate secret sauce of hybrid cloud connectivity: virtualization with a strong user base (VMware), automation (CA Technologies), hardware acceleration (Broadcom’s core semiconductor business) and cyber defense (Symantec).
With this portfolio, implementing a Secure Access Service Edge a.k.a. SASE should be a no-brainer. Existing VMware workloads would be the first to benefit.
Whether they succeed in execution, is a different matter.
At any rate, investment banks get to cash in. Goldman Sachs and JPMorgan Chase are representing VMware. Barclays, Bank of America, Credit Suisse, Morgan Stanley and Wells Fargo are representing Broadcom.
The acquisition isn’t expected to complete until Broadcom’s fiscal 2023, which translates into: sometime by November of that calendar year.
To sweeten the deal, Broadcom wants to rename itself VMware. It’s like saying, “we mean business”.
Until early September 2022, VMware is free to go look for competing offers. So far, Broadcom’s marching orders involve no changes to the existing roadmap, pricing or support. This is not to say there won’t be any.