VMware May Test Broadcom’s Code for Software Buys

Hock Tan, CEO of Broadcom, in 2018.



Money seems to have burned a hole in Broadcom‘S

AVGO -3.10%

the bag. A lot of money.

The super-acquisition chip company first set its sights on the software market in 2018 with its surprise $18.9 billion acquisition of CA Technologies. But its growth strategy became more expensive as software valuations skyrocketed. The S&P 500 Software & Services group is up 120% from the time of the CA deal to the index’s peak late last year — nearly double the S&P 500’s gain during that time. A race at the privately held SAS Institute last year went futile when employees, fearing losing their culture of privilege, opposed the reported deal.

Currently, software companies cannot be as picky as valuations have plummeted due to the widespread market sell-off. That, combined with the steady growth of Broadcom’s free cash flow, has clearly encouraged the company to try again — in a big way. The Wall Street Journal reported on Sunday night that the company is in “advanced talks” to acquire VMware.

VMW 24.78%

The software maker that spun off Dell Technologies late last year had a market value of about $40 billion before the news. The Journal reported Monday afternoon that the companies are discussing a deal for about $60 billion.

That would be Broadcom’s largest acquisition to date, though it’s still less than half of what the chipmaker proposed to pay Qualcomm before that deal was handled by the White House in 2018. Price Shares of Broadcom fell about 3% on Monday’s news. , although initial response has been generally positive. Bernstein’s Stacy Rasgon cited Broadcom’s filings in the transactions and said “Hock (CEO Hock Tan) has yet to do a bad thing, software or otherwise.”

The deal will also transform Broadcom from a chip maker that specializes in software. Currently, VMware generates about $13 billion in annual revenue – nearly double the size of Broadcom’s current software business. If the deal is closed in Broadcom’s current fiscal year, about 45% of the company’s total revenue for the fiscal year ending October 2023 will be from software, based on current Wall Street projections. for two companies. And that’s with Broadcom’s chip business still posting double-digit average annual growth during that time.

But that may depend on how well Broadcom changes VMware’s business to fit its own parameters. Software companies often spend significant amounts of money on sales and marketing in pursuit of high growth rates. At an analyst meeting in November, Broadcom outlined its preference for a contrarian approach — one that generates average single-digit growth with margins. operate in the 70% range. VMware typically spends about 32% of its revenue on sales and marketing, with adjusted operating margins expected to fall below the 30% mark this year as it works to transform operations. business to the cloud model.

Broadcom may have something else in mind.

Write letter for Dan Gallagher at dan.gallagher@wsj.com

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https://www.wsj.com/articles/vmware-may-test-broadcoms-code-for-software-buys-11653324201?mod=rss_markets_main VMware May Test Broadcom’s Code for Software Buys

Edmund DeMarche

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