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May 26, 2022

What does the future hold for VMware after $61bn Broadcom takeover?

The virtualisation specialist must retain an independent outlook if it is to thrive under the ownership of the chipmaker.

By Ryan Morrison

Broadcom has confirmed it is acquiring VMware in a $61bn deal. The purchase of the virtualisation specialist, which has been operating as an independent business since its split from Dell in November, will broaden chipmaker Broadcom’s software offering, and could deliver significant growth in future despite the highly competitive nature of the cloud computing market.

VMWare has become an acquisition target since its split from Dell
VMware has become an acquisition target since its split from Dell in 2021. (Photo Illustration by Pavlo Gonchar/SOPA Images/LightRocket via Getty Images)

The deal, confirmed today, comes following a week speculation that the two companies were about to join forces. VMware will incorporate Broadcom’s existing software business into its operation once the transaction is complete.

Hock Tan, president and CEO of Broadcom, said: “Building upon our proven track record of successful M&A, this transaction combines our leading semiconductor and infrastructure software businesses with an iconic pioneer and innovator in enterprise software as we reimagine what we can deliver to customers as a leading infrastructure technology company.”

Raghu Raghuram, VMware CEO, added: “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. Collectively, we will deliver even more choice, value and innovation to customers, enabling them to thrive in this increasingly complex multi-cloud era.”

VMware: the story so far

VMware was founded in 1998 and became the first company to commercially virtualise x86 architecture. It took a hardware-agnostic approach, and as a result can be found in almost every data centre, and is now becoming an important part of cloud architecture.

In 2004 EMC purchased VMware for $625m in cash, listing 15% of the firm publicly in 2007 and later joined Dell when the OEM purchased EMC in 2016. Dell spun off its 81% stake in VMware last year, creating an independent business valued at $64bn at the time.

The virtualisation software VMware created helped to revolutionise the relationship between software and servers before the development of cloud computing. It allowed companies to operate multiple operating systems with different production software from the same machine.

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VMware has more than 40,000 clients, many of which are in the Fortune 1000, making them a tier-one software vendor, well placed to capitalise on trends such as cloud and microservices

Steven Schuchart, principal analyst at GlobalData, told Tech Monitor that its core software, networking and other products are widely deployed across public and private sector organisations, thanks largely to the arms-length approach taken by Dell during its ownership.

“When Dell acquired EMC and VMware with it, there were concerns Dell would make VMware kind of a Dell-only offering,” Schuchart says. “VMware’s legacy was and is multi-vendor and neutrality. By allowing it to operate independently, it helped ease fears and allowed the all-important neutrality to continue.”

Since the split with Dell, VMware’s value has fallen. It was worth $40bn on the Friday before the first leaks came out about a potential takeover by Broadcom. At the time of publication, its market cap had risen to $50bn, spiking as a result of the rumours.

“It has legions of devoted customers and is moving quickly to make partnerships with the likes of Kyndryl, AWS, and others," says Schuchart. "It has been proactive about cloud, providing its customers a path to cloud, and it has been putting tons of effort into VMware Tanzu, which addresses containers, microservices and modern application delivery."

The only downside, says Schuchart, is cost. "VMware’s software and services are considered pricey by some," he says. "If open source or much cheaper proprietary alternatives mature to being close to VMware’s functionality and ease of use in the cloud, as well as application delivery, that will decimate VMware’s margins and importance in the industry.”

While VMware has tried to position itself as a neutral, multi-cloud, solution, Bola Rotibi analyst at CCS Insight says it faces a fight to convince customers to use its services, with the hyperscale public cloud providers - and other vendors - offering similar solutions. “The challenge you have is that the market is changed and is competitive in terms of what VMware is offering, not just through partner services but also in others entering the space," Rotibi says.

“While they offer cloud management services, all of the others including AWS and Microsoft Azure offer their own capabilities in DevOps and maintenance. The market has got more competitive, cloud players have built out their own capabilities and clients have moved into cloud and gone with native solutions.“

Why does Broadcom want VMware?

Steven Dickens, senior analyst at Futurum Research says the deal could prove to be a bargain for Broadcom.

Dickens believes VMware has significant growth potential despite the competitive landscape. “Tanzu is not really priced into its market cap," he says.

Tanzu is a suite of products developed by VMware to help users run and manage multiple Kubernetes clusters across public and private clouds. Kubernetes, also known as K8s, is an open-source system for automating the deployment, scaling, and management of containerised applications.

Schuchart adds: “The only reason I can think Broadcom would want VMware is to diversify its product portfolio into software, which generally has a much less lumpy and more predictable income flow due to software subscriptions.”

However, he doesn’t think there will be much synergy between the two, at least not enough to justify the rumoured price. Adding that “Broadcom’s acquisition strategy seems to be around just trying to buy relevance in the enterprise IT market beyond its base chips business.”

What does the future hold for VMware?

Rotibi told Tech Monitor Broadcom is likely trying to shore up its infrastructure offering and “making it very solid so it has the ability to tell an equal story in meeting cloud providers, but also ensuring the transition into greater cloud use is smooth. Raising their stake in the market.

“What it doesn’t have is the middleware and management services which VMware brings, which would unify the other pillars of Broadcom’s portfolio capabilities.”

Dickens says he expects that Broadcom will allow VMware to continue operating independently. He cites Broadcom's $18bn purchase of software company CA Technologies in 2018 as an example of how the relationship might work. “Broadcom has been amazing for the CA business," he says. "Investment and scale have been the result of the CA acquisition with very little downside.”

Schuchart agrees, adding it makes “very little sense to tightly integrate VMware which is known for being hardware agnostic, and almost hardware-hostile to Broadcom.”

But he does not take a favourable view of the CA deal, suggesting that it has since disappeared inside Broadcom. Adding that a similar approach to VMware would be “devastating to VMware and its customers.”

“The only way the acquisition of VMware by Broadcom works is if they leave VMware as an independent division, which is not forced to favour Broadcom products or exclude Broadcom’s competitor products," he says.

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