Broadcom Acquires VMware to Expand Software Portfolio

Broadcom today pulled the trigger on an acquisition of VMware for $61 billion in cash and stock that could dramatically expand its software portfolio.

Tom Krause, president of the Broadcom Software Group, told investors that the Broadcom infrastructure software group will become part of VMware once the deal closes. The deal, however, includes a 40-day “go shop” option for VMware to court another suitor who might be willing to acquire VMware at a higher price.

Should the deal close, Broadcom is committed to melding its portfolio of DevOps, AIOps and security offerings with the VMware portfolio, said Krause. Broadcom acquired CA Technologies in 2018 and the enterprise division of Symantec in 2019.

Krause said Broadcom plans to invest in the core VMware vSphere, vSAN and vRealize management software platforms that drive the most revenue for VMware today. Broadcom is also committed to increasing VMware earnings from $4.7 billion to $8.5 billion within the next three years. The primary driver of that growth will be savings generated by eliminating duplicate functions in the combined company and a forecasted increase in the volume of workload running on VMware platforms, said Krause. There are currently 300,000 vSphere customers that are increasing the number of workloads they are deploying both in the cloud and in on-premises IT environments, he noted.

Broadcom is also committed to shifting as many customers as possible away from perpetual software licenses to subscriptions that generate more consistent recurring revenues, added Krause. VMware today reported revenue for the first quarter of fiscal 2023 was $3.09 billion, an increase of 3% from the first quarter of fiscal 2022. Subscription and software-as-a-service applications accounted for 29% of total revenue for the quarter. Subscription and SaaS revenue for the first quarter was $899 million, an increase of 21% year-over-year.

Dan Kirsch, principal analyst and managing director for Techstrong Research, an arm of the parent company of DevOps.com, said given the size of the deal, many existing VMware customers are naturally going to be nervous. The primary concern will be the degree to which Broadcom might attempt to increase licensing fees to meet its financial goals, he noted.

The acquisition of VMware comes at a time when the number of workloads being deployed in the cloud is far outpacing the rate at which workloads are being deployed in on-premises IT environments. The bulk of those workloads run on non-VMware-based hypervisors. However, many of the workloads that run on VMware today in a data center are being shifted to the cloud. VMware has also invested in building a Tanzu platform for building and deploying cloud-native applications on Kubernetes clusters.

Broadcom is committed to investing in research and development across the combined software portfolio, said Krause.

It remains to be seen how much of the VMware employee base will remain with the combined company. It’s not uncommon for there to be a ‘brain drain’ in the wake of a major merger, noted Kirsch.

Whether or not the deal closes, a lot of IT teams will, at the very least, be reviewing their VMware software portfolio in the weeks ahead as the new Broadcom-VMware entity evolves. In fact, it’s likely that the acquisition of VMware will set off a wave of mergers and acquisitions during what appears to be an economic downturn. That means regular reviews of vendor relationships will soon be the order of the day for a wide range of IT organizations.