Why Broadcom is acquiring VMware

Article By : Nitin Dahad

Is Broadcom acquiring a cash cow or building a vertical stack of components from processor to application? The latter could be highly transformative, but the question of how effective a full stack strategy.

Last week saw another big acquisition story with news that Broadcom intends to buy VMware for $61 billion. This is clearly a push by Broadcom to go full stack from processor to application, but is this going to be a good strategy, given the competition from players like Red Hat or the Kubernetes approach?

Under the deal, Broadcom Software Group will rebrand and operate as VMware, incorporating Broadcom’s existing infrastructure and security software solutions as part of an expanded VMware portfolio. Broadcom said the acquisition will advance its strategy to “to build the world’s leading infrastructure technology company, with track record of acquiring established, mission-critical platforms.”

VMware office
(Image: VMware)

VMware is an established provider of multi-cloud services and virtualization technology, an innovation it says positively transformed x86 server-based computing. VMware played a key role in the software-defined data center, and in virtualizing networking and storage, before evolving to a hybrid cloud and digital workspace.

By bringing together the Broadcom Software portfolio with the VMware platform, the combined company aims to provide enterprise customers an expanded platform of critical infrastructure solutions to address complex information technology infrastructure needs. Broadcom said in its press statement that the combined solutions will enable customers, including leaders in all industry verticals, greater choice and flexibility to build, run, manage, connect and protect applications at scale across diversified, distributed environments, regardless of where they run: from the data center to any cloud and to edge-computing.

Raghu Raghuram, chief executive officer of VMware, said, “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.” Tom Krause, president of the Broadcom Software Group, added, “VMware’s platform and Broadcom’s infrastructure software solutions address different but important enterprise needs, and the combined company will be able to serve them more effectively and securely.”

How VMware fits in the broader Broadcom strategy: an analyst view

Broadcom started out as a semiconductor chip company (Avago acquired Broadcom in 2015 and renamed itself Broadcom, with the AVGO stock ticker) but built a software infrastructure portfolio with acquisitions of Brocade (2017), CA Technologies (2018) and Symantec (2019).

Analyst firm Omdia’s cloud and data center research practice thinks that Broadcom’s goal is (1) acquire companies with established technology and client base which are less exciting to investors and are cheaper, (2) optimize cost, (3) milk them dry over the next 10-15 years. Software can have incredible longevity because of application interdependencies and the uplift to rearchitect an entire environment. The Omdia team, led by Vladimir Galabov with chief analysts Michael Azoff, Roy Illsley and principal analyst Manoj Sukumaran, said, “The world might be going cloud native but most application still run on (legacy) VMs (virtual machines).”

They point out that VMware has some similarities with CA. It is the market leader in the well-established virtualization software which is generating a steady revenue stream. It’s also facing a challenge – it was late to the high growth market for container software and microservices, where Red Hat established itself as a leader. VMware is also going through a transition in its revenue streams from upfront license payments to a SaaS model. Both the business model transition and the disruption to the server virtualization market have impacted VMware’s revenue growth, which slowed from double to single digits on an annual basis.

However, Omdia said, don’t expect their revenue to suddenly drop off a cliff. Rearchitecting an application environment is difficult and virtualization users will not suddenly switch to an alternative abstraction technology.

They indicate the key to VMware’s growth acceleration plan is investing in growing its container software business, formed from the acquisition of Pivotal. Pivotal’s staff, software and services are the main building blocks of VMware’s Tanzu. Because the organization at VMware enabling Tanzu is comprised of mostly legacy Pivotal colleagues, it has a strong open source and agile/DevOps culture.

For example, they are a strong contributor to efforts like Java Spring and Spring Boot. The question is how will Broadcom treat VMware’s container business? It is not key to VMware being a cash cow and will require an investment push to seriously compete with Red Hat. Given how focused on optimizing costs Broadcom’s leadership team is, Omdia said it makes them concerned that VMware’s container software business would not get the investment needed to grow, or worse, get the chop.

Building a vertical stack from processor to application

If Broadcom is not just acquiring a cash cow but building a vertical stack of components from processor to application, then this move could prove to be highly transformative as it provides them with another key capability in that stack. The question of how effective a full stack strategy is, has been a topic of debate in the industry for a while, Omdia notes. IBM with Red Hat have gone the open route. Dell acquired VMware then disposed of it, after presumably deciding the full stack strategy was not working.

Going for edge computing

In enabling edge computing, a full stack model is highly appealing as many enterprises do not have the resources to create a custom edge solution that works well. Being able to purchase an appliance and just drop the application on it with the confidence that it will work and be compatible with the rest of the enterprise’s environment is appealing.

VMware has a large customer base and is a platform in all public clouds as well as on-premises, so in theory it is very well placed. However, the VMware technology as a stack is expensive, when compared to the newer Kubernetes approach. Therefore, the big question posed by Omdia’s analysts is: if Broadcom does have full stack ambitions, how is it going to package and price the stack.

Not a done deal yet

While the boards of directors of both companies have approved the terms of the agreement, the transaction is still subject to the receipt of regulatory approvals and other customary closing conditions, including approval by VMware shareholders. The merger agreement provides for a “go-shop” provision under which VMware and its board of directors may actively solicit, receive, evaluate and potentially enter negotiations with parties that offer alternative proposals during a 40-day period following the execution date of the definitive agreement, expiring at 11:59 p.m. Pacific Time on July 5, 2022.

If there is no other proposal, The transaction, which is expected to be completed in Broadcom’s fiscal year 2023, which ends on 1 May 2023.

This article was originally published on Embedded.

Nitin Dahad is a correspondent for EE Times, EE Times Europe and also Editor-in-Chief of embedded.com. With 35 years in the electronics industry, he’s had many different roles: from engineer to journalist, and from entrepreneur to startup mentor and government advisor. He was part of the startup team that launched 32-bit microprocessor company ARC International in the US in the late 1990s and took it public, and co-founder of The Chilli, which influenced much of the tech startup scene in the early 2000s. He’s also worked with many of the big names—including National Semiconductor, GEC Plessey Semiconductors, Dialog Semiconductor and Marconi Instruments.


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