Info-tech

Broadcom’s pursuit of VMware takes page from Michael Dell

Bloomberg | | Updated on: May 24, 2022

Broadcom might be taking inspiration from Dell in pursuing a big-ticket deal that would elevate the company’s position in a sector that it wants to dominate in the future

When Michael Dell bought VMware Inc. in 2015, his eponymous technology company was facing an identity crisis. Dell himself knew that the business he founded had become much more than a personal computer maker, but many investors and customers still associated the brand with PC hardware.

Dell’s acquisition of VMware via its parent EMC Corp, a data storage provider, solidified it into the fast-growing cloud business. VMware is a pioneer in virtualization, a technology at the heart of cloud computing that allows servers to run more efficiently. Last year, the business that combines cloud-related products such as servers, storage and infrastructure accounted for half of Dell’s operating income. In October, the company spun off its controlling stake in VMware, but Michael Dell and private equity firm Silver Lake remain the biggest investors in the software firm.

Now Broadcom Inc. is interested in acquiring VMware. The target was worth about $40 billion at the end of last week, and the buyer closed it at $220 billion.

At first glance, it might not make much sense that one of the world’s pre-eminent chip designers would want to buy a maker of specialized software. But Broadcom Chief Executive Officer Hock Tan might be taking inspiration from Michael Dell in pursuing a big-ticket deal that would elevate the company’s position in a sector that it wants to dominate in the future, rather than in one it occupies today.

No stranger to big deals

Tan is no stranger to big deals. Seven years ago the company he ran at the time, Singapore-based chipmaker Avago Technologies Inc., announced a $37 billion stock-and-cash bid for what was then called Broadcom Corp. It remains one of the biggest technology acquisitions in history. Both companies were leaders in various types of communications chips used in cellular phone systems, Wi-Fi networks and automotive and defence industries.

That deal went through and Avago took the name of its target (and kept the AVGO ticker symbol). But Tan wasn’t done, and in 2019 bought the enterprise security business of Symantec Corp. for $11 billion, a part of his move to reorient the company away from just selling chips to offering a broad array of systems products including storage and networking.

Part of that new focus has been a move into the area of software that includes network and information security, authentication and access control and developer tools. That division accounted for 26 per cent of revenue last year, but more importantly enjoys operating margins 16 percentage points wider than Broadcom’s chip division.

Tan has already said that the current chip boom won’t last, and he has made clear that he doesn’t want to be stuck with the lower growth rates that may result when today’s semiconductor party becomes tomorrow’s hangover. If he is right, then broadening the business into one with better margins and better long-term growth prospects could be a smart move. If he is wrong, he would likely be forced out, leaving behind a huge company with myriad integration problems.

Broadcom, the chip designer of old, would have had no business buying a company that makes virtualization software. Yet that’s the point. Tan doesn’t want to remain a chipmaker any more than Michael Dell wanted to remain a PC maker. Bold plans require big moves, and this may be the deal that brings it all to fruition.

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Published on May 24, 2022
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