Broadcom Inc. (AVGO-US), which always wants to grow by mergers and acquisitions, has a new target. This time it locks in cloud service provider VMware (VMW-US), and the transaction may be as soon as this Thursday (26th). ) Announce. Broadcom shares fell after the news, signaling the market’s initial view.
VMware closed up 25 percent at $117.43 a share on Monday, its biggest one-day gain since 2007. Broadcom closed down 3.1 percent at $526.36 a share, with a market value of about $215 billion.
Acquisitions are commonplace for Broadcom, the chip company that first set its sights on the software market in 2018 with a surprise $18.9 billion purchase of CA Technologies. This has also become Broadcom’s new direction in mergers and acquisitions after the acquisition of Qualcomm was stopped in early 2018.
Valuation could reach $50 billion
VMware was spun off from Dell (DELL-US) last year and has a market value of about $40 billion. If Broadcom paid a premium of about 20%, as it did when it bought CA, VMware would be valued at nearly $50 billion.
Broadcom’s decline may reflect the market’s view of software companies today, which have seen their valuations shrink significantly in the past as the market tumbled across the board.
The deal underscores Broadcom’s desire to move into software, hoping to take the company’s business to the next level. VMware’s current annual revenue of about $13 billion is nearly double the size of Broadcom’s current software business.
Most importantly, VMware has always been considered one of the most important companies in the cloud computing industry. In addition, the current demand for the cloud has been expanding, and most companies are increasingly relying on cloud services, which is the main reason for its attraction to Broadcom.
In line with Broadcom’s new strategy
Wells Fargo analysts believe the acquisition of VMware makes strategic sense, in line with Broadcom’s strategy to focus on building deeper enterprise infrastructure software.
The acquisition of VMware would roughly triple the size of Broadcom’s software division and bring the combined company’s overall software portfolio to nearly 50 percent, Bernstein analysts said in a note to clients.
Reports suggest Broadcom’s expansion of its software footprint is in line with Chief Executive Hock Tan’s growing pessimism about the chip industry.
In the March earnings report, Tan noted that the semiconductor industry will not be able to maintain its current trajectory, and he expects the chip business to decelerate to a historical growth rate of around 5%.
Intel (INTC-US) CEO Pat Gelsinger, who has been with VMWare for a long time, said he is also watching the big deal and said it would be good if it helped VMware become a more attractive and innovative company. , he also believes that the industry may consolidate further as the valuation of technology stocks declines.