VMware’s emancipation will have lasted seven months. On November 1, the company completed its separation from Dell Technologies, which controlled it with 81%; the deal provided for Michael Dell to remain the dominant shareholder (and chairman) with 40.2%. It may have already entered the calculations to orchestrate a gradual divestment, but suddenly a buyer appeared who, without being a competitor, was willing to ratify its preference over the VMware software on which Dell Technologies’ hybrid strategy is based.
Last week the sale of VMware to the company Broadcom at a price of 69,000 million dollars (61,000 million plus debt absorption) was announced. The figure represents a 44% premium over the price prior to the first rumors, which makes it very unlikely that a higher offer will emerge, despite a clause that leaves that door open until July 5.
Michael Dell has publicly described the offer as “unsolicited”, but the press has reported that it was he who invited Hock Tan, CEO of Broadcom, a Malaysian businessman with an American passport, to his Texas mansion. The truth is that both agreed on the fundamentals: half of the price will be paid in cash, which will bring about 12,000 million to the account of the former, who will continue as a shareholder of the combined company (initially, another 12,000 million in shares), a necessary condition for Broadcom to defend its good rating in the debt market.
Broadcom is a semiconductor manufacturer that, under the leadership of Hock Tan, has successively acquired and engulfed three software companies: Brocade ($5.5 billion), CA Technologies ($18.9 billion) and half of Symantec ($10.7 billion in 2019). The pattern of these operations should be repeated this time: rapid assimilation / cost discipline / downsizing / resale of businesses that do not interest the buyer. A classic: “The acquiree ends up paying the price of its acquisition,” summarizes analyst Tracy Wang, from the consulting firm Forrester Research.
In theory, with the addition of VMware, Broadcom’s software business would go from 8,000 to 20,000 million, half of its turnover of the group built by Tan. Its declared objective is that, three years after the absorption, it contributes 8,500 million to the EBITDA (profit before taxes) of the resulting company. A jump from the 3,500 million of the fiscal year ended in January that can be painful.
What is Broadcom looking for in VMware? First of all, to reinforce a perimeter that is currently unbalanced in favor of semiconductors despite its investments in software companies that it has put on a very severe diet. It is notorious that this sector yields much higher margins than those obtained by selling hardware.
It happens that VMware is not just any software company: it controls 72% of the world market for virtualization, a technique that – simply put – converts physical servers into software applications or virtual machines (VM). Its growing appeal is that, although many workloads have migrated to the cloud, VMware is the right choice for companies that prefer a hybrid formula that combines their data centers with cloud services.
Aside from cashing in, what has Michael Dell seen in Broadcom’s offering? The opportunity to undo a financial commitment that he has dragged on since 2016. And to do it without handing over VMware to a competitor and without being directly responsible for shrinking a company that he described as the jewel of his company.
