Broadcom Is Buying VMWare For $61 Billion

Key takeaways

• Microchip manufacturer Broadcom has offered $61 billion to buy cloud computing and virtualization company VMWare
• The deal would see shareholders receiving cash consideration of $142.50 per share or a swap of 0.252 Broadcom stock per VMWare share
• The global microchip shortage has been a catalyst for Broadcom CEO Hock Tan to expand the revenue centers for the company beyond hardware

One of the biggest ever tech acquisitions is about to go down, and it involves two companies you may have never even heard of. Microchip heavyweight Broadcom is set to acquire cloud computing company VMWare, in a deal worth $61 billion in cash and stock.

To put the size of the acquisition in perspective, only two previous takeovers in the tech industry top this deal: Dell’s $67 billion buy-out of data storage company, EMC, in 2015 and Microsoft’s still-in-progress takeover of Activision Blizzard for $68.7 billion.

So who are these companies, what do they do and why is this deal so big?

What does Broadcom do?

Broadcom is making a big baller move here, but how does a company that flies under the radar have the weight to make a deal of this size? Well, Broadcom may not have their logo on the back of your iPhone or Android, but they design and manufacture the semiconductor (or chip) that is the brains of these powerful devices. Their chips can also be found in cars, gaming consoles, computers and medical devices. It’s easy to see how the chip industry is big business.

Broadcom’s business expands even further than this, into areas such as wireless connectivity, broadband and 5G infrastructure. They’re also one of the biggest behind-the-scenes players of the omnipresent ‘cloud’ by providing crucial electronic components to Google’s cloud and Amazon’s AWS.

Not only does Broadcom have a lot of irons in valuable fires, it’s also very good at what they do. They generate huge cash flow, with $28.50 billion in revenue to the end of January 2022 with an impressive operating profit margin of 34.68%. Simply put, Broadcom generates a lot of cash with healthy margins.

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The global chip shortage

Broadcom has been at the center of the ongoing microchip shortage in the semiconductor space. You’ve probably noticed that the lead times for electronics have been crazy over the past couple of years. If you order a new Macbook from Apple, you’ll be lucky if it’s delivered to your door within a couple of months. New car orders are taking literally years to be filled in some cases. There’s been a lot of Covid-induced supply chain issues that have added to this problem, but a huge part of it has been the shortage of microchips.

While much of the world has returned to normal, there are still strict lockdowns being enforced in China, the world’s major manufacturing center for these chips. Coupled with a huge amount of pent up demand and backlogged orders, the shortage is likely to improve over time, but will take a while yet to resolve altogether.

CEO of Broadcom Hock Tan seems to have done a better job than many in navigating this problem. In a quarterly earnings call late last year, he explained that they had purposefully held back supply and shifted many of their customers to long term, non-cancellable deals. This strategy aims to limit the impact of short-term supply and demand fluctuations on the company’s bottom line, and this play for VMWare is a further step in that direction.

About VMWare

Ok, so if you’ve never heard of Broadcom before, I can almost guarantee you’ve never heard of VMWare. The VM in the company name stands for Virtual Machine, and it’s this area (known as virtualization) for which the company is best known. As well as the virtualization technology, VMWare offers various cloud computing solutions for businesses.

Virtualization isn’t too well known in the consumer world, but it is super important when it comes to company IT infrastructure. A virtual machine is like a “computer within a computer”. If you’ve ever had to log in remotely via your own device to a work device, this is likely to have been done using software from VMWare or their main competitor Citrix. The technology allows you to operate a different computer ‘virtually’ without having to be sitting at that computer. So if you had a desktop PC in your office, you could log into that at home using your laptop. What you would see on your laptop screen would be exactly as if you were sitting at your work desktop.

This technology has some major benefits for things like remote work, but it goes a lot further than that. The ability to have multiple virtual machines running off a single large server can be much more cost effective than having multiple small servers serving different employees.

It also provides big benefits from a security standpoint. Virtual machines can create a safe ‘sandbox’ environment for testing upgrades or changes to the IT infrastructure. This allows companies to test and review before launching upgrades that might end up breaking everything!

The reason why Broadcom is prepared to pay the big bucks for VMWare is twofold. Firstly, it allows them to expand from the manufacturing business into the software business. Generally speaking, software is a great business model. Clients sign up for monthly or yearly plans, so it creates consistent cash flow with predictable operating costs. There’s a reason why every single company in the world wants you to sign up for a monthly subscription these days!

Secondly, VMWare is the biggest company in this space. With this acquisition, Broadcom won’t just be buying a place at the table, they’ll be entering the game as the world’s largest player. It will make Broadcom an even more compelling story, with the ability to generate revenue on both the hardware and software components of the industry.

The deal

We know the deal is a big one, but what does the headline of $61 billion mean for VMWare investors? Essentially Broadcom has offered to buy every share at a cash price of $142.50, or an exchange of 0.252 in Broadcom stock for every 1 VMWare share. VMWare hasn’t been immune to the volatility that has plagued the tech sector in 2022, and in the days leading up to this announcement it was trading at around $95 per share.

On the face of it, that looks like a pretty attractive offer at around 50% premium to the market price. Long term holders may not be as enthusiastic about the deal, given that VMWare was trading as high as $203 in early 2019, and has hovered around $140 for most of the past 2 years.

Investors who are bullish on Broadcom’s long term plans may look to take advantage of an attractive entry into the stock via the share swap, while those who aren’t as positive will likely see this as a good opportunity to cash out.

As with any merger or acquisition of this size, it represents a sizable pay day for the investment banks. Most of the big names are represented in the announcement, with Goldman Sachs and JPMorgan Chase working on the side of VMWare and Barclays, Bank of America, Credit Suisse, Morgan Stanley and Wells Fargo. representing Broadcom.

The acquisition isn’t expected to complete until 2023 and, interestingly, VMWare have inserted a 40-day go-shop clause into the deal, which allows them to entertain rival bids during that period.

Get in on the action

If nothing else, this deal highlights the huge investment opportunities that can be found in less obvious places. We all know the big names of Silicon Valley like Apple and Google, but often the vast majority of their products, infrastructure and services are built on technology and hardware created by companies such as Broadcom and VMWare.

At Q.ai we’ve been on this for a while, which is why we’ve created a limited edition Global Microchip Shortage Investment Kit. It uses a combination of AI and expert human asset management to find investments that are benefitting from the ongoing worldwide chip shortage. You can even turn on Portfolio Protection to help protect against future market volatility.

Download Q.ai for iOS today for more great Q.ai content and access to over a dozen AI-powered investment strategies. Start with just $100. No fees or commissions.