Broadcom announced Thursday its plans to expand into software by acquiring VMware, which spun out from Dell last year, for $61 billion.
It's an unusual move for a chip company to buy a software company, especially as rivals like Intel double down on their chip business. Broadcom and VMware have little overlap: Broadcom builds 5G and data-center products while VMware develops cloud and virtualization software.
Broadcom is seeking paths outside its traditional chips, analysts say, especially with the ongoing chip shortages. VMware can provide opportunities in enterprise software. The deal could also help Broadcom compete with clouds like Amazon and Microsoft, providing the company with a better strategy for hybrid and multicloud operations.
"They want to smooth out some of these highs and lows in the chip space," Dan Morgan, a trust-portfolio manager at the financial services firm Synovus, said. "One of the best ways to do it is to move to a steady high-cash-flow enterprise-software segment of their business."
This deal is 'pro-competitive'
This deal would rank among the largest tech deals of all time, including Dell's $67 billion acquisition of EMC and IBM's $34 billion acquisition of Red Hat.
While Broadcom has made massive acquisitions in recent years — including CA Technologies for $18.9 billion in 2018 and security company Symantec in 2019 for $10.7 billion — it's been hunting for an even larger deal. The company tried buying Qualcomm, but President Donald Trump blocked the deal in 2018 on national-security grounds.
Broadcom acquiring Qualcomm would've faced major regulatory hurdles because they're both chip companies, Morgan said. Nvidia faced similar challenges when it previously tried acquiring Arm.
"It's a completely different deal because software is a major change of strategy, even for them," Morgan said. "To go from Qualcomm to VMware? They want to get more involved in hybrid cloud. They want to continue to build out on the enterprise."
Despite a "hostile regulatory environment" and the size of the deal, Marty Wolf, managing partner at Martinwolf, predicts the VMware acquisition will be approved because bundling of the two companies' products will drive down prices in both cloud and 5G.
"By having more strong players and hybrid cloud, it accelerates growth and will lower prices over time," Wolf said. "It's procompetitive, not anticompetitive."
How it helps Broadcom
Broadcom needed to "reset its software narrative," Dennis Smith, a Gartner vice president and analyst, said. Analysts compare this deal to IBM's acquisition of Red Hat and to Cisco and Nvidia; both hardware companies evolved to software. Broadcom could potentially triple its software revenue to $21 billion, said Vijay Rakesh, a managing director at Mizuho, a banking-holding firm.
Both companies overlap in security, as Broadcom owns Symantec. Still, they face competition from companies like CrowdStrike, SentinelOne, and Cybereason, so this deal likely would not alter competition in the security market, Gregg Moskowitz, another managing director at Mizuho, wrote in a note.
Although VMware and Symantec can collaborate, Naveen Chhabra, a senior analyst at Forrester, sees some challenges.
"First, it's easier said than done. And second, Broadcom's acquisition strategy in the past does not showcase an innovation-focused mindset," Chhabra said.
How it helps VMware
Although VMware's products have grown, Wall Street has concerns about VMware's ability to "execute on a consistent basis," Moskowitz wrote. VMware prioritized growing its subscription-software business, but he added that this transition has been "choppy."
This deal could also impact VMware customers because they may have viewed its spinoff from Dell as a chance to "grow without hindrance," Tracy Woo, a senior analyst at Forrester, said.
Still, Broadcom's size will help VMware better compete in cloud.
"If they're able to pull together synergy with Broadcom's hardware and software products, that could be pretty powerful here," Smith said.
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