Chipmaker Broadcom to buy software group VMware for $69bn

US chipmaker Broadcom has agreed to acquire cloud software company VMware for $69bn, including debt, in a takeover that signals the market for large corporate mergers might be thawing after a stock market rout at the start of the year.

VMware shareholders will be able to choose to receive either $142.50 in cash or 0.2520 shares of Broadcom stock for each of their shares in the software group, at a 33 per cent premium over the value of the company before talks emerged last week.

The takeover, which is being supported with $32bn in bank financing, would help transform Broadcom, an acquisitive semiconductor group, into a diversified tech company ranging from chips to cloud computing services.

Hock Tan, the Malaysian-American billionaire who leads Broadcom, has been on the hunt for a software deal for years after his attempt to acquire chipmaker Qualcomm was blocked in 2018 by then US president Donald Trump over national security concerns.

“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,” Tan said.

In striking a deal for VMware, Tan, known as the chip industry’s arch consolidator, is opportunistically picking up one of the software industry’s most valuable and profitable companies.

VMware’s stock price had fallen about half from its 2019 peak — and 20 per cent below where it traded at the beginning of the year — before deal talks emerged. But VMware’s high profit margins and stable recurring revenues offer the ability for Broadcom to finance a large takeover and then quickly pay down debt.

“They are very disciplined,” said Tony Wang — who covers Broadcom for T Rowe Price, one of its largest outside shareholders — adding that the deal did not “surprise” him given that tech stocks were more attractively valued after this year’s market sell-off. When technology valuations were high in recent years, Broadcom resisted the urge to make large purchases, said Wang.

VMware is the biggest test yet of Tan’s strategy to grow Broadcom through acquisitions. Many see his approach as akin to a private equity firm, where the buyer will sell off non-core assets and cut costs to increase overall profits.

“Hock Tan is running Broadcom kind of like a private equity shop,” said Jordan Chalfin, a senior analyst at CreditSights. “He has a reputation for slashing costs. That is probably going to be part of the playbook too.”

If completed, the deal will further turn Broadcom into a diversified technology company instead of one focused principally on semiconductors. Inclusive of VMware, Broadcom’s revenues would be split evenly between software and semiconductors.

Broadcom acquired enterprise software company CA Technologies for $18.9bn in 2018 and then purchased cyber security group Symantec a year later for $10.7bn, propelling it into the software sector.

In VMware, Tan is targeting a company that is considered one of the cloud computing industry’s most important groups. Its services are used by large corporations to manage private and public cloud networks as well as data centres.

Broadcom’s acquisition would also provide a big financial payout for personal computer billionaire Michael Dell, who acquired VMware in 2016 alongside private equity firm Silver Lake in a $67bn takeover of technology conglomerate EMC.

Dell kept VMware independently managed from his personal computer and tech infrastructure company Dell Technologies, and the company spun-off its 81 per cent stake in VMware in November last year.

Dell, who is chair of VMware, owns about 40 per cent of its outstanding shares, a stake worth about $24.5bn under the terms of the takeover agreement. He will roll half that stake into the new combined company, signalling confidence in Tan’s strategy for VMware.

“The way Michael Dell and Silver Lake are good at financial engineering, Broadcom is as well,” said Chalfin. “VMware is an ideal currency.”