Broadcom Is Buying VMWare For $61 Billion

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key takeaways

  • Microchip maker Broadcom has offered $61 billion to buy cloud computing and virtualization company VMware
  • The transaction would result in shareholders receiving a cash return of $142.50 per share or 0.252 Broadcom stock swaps per VMWare share.
  • The global Microchip shortage has been a catalyst for Broadcom CEO Hock Tan to expand the company’s revenue centers beyond hardware.
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One of the biggest tech acquisitions of all time is about to go down, and it involves two companies you’ve never even heard of. Microchip heavyweight Broadcom is set to acquire cloud computing company VMware for $61 billion in cash and stock.

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To put the size of the acquisition in perspective, only two previous acquisitions in the tech industry have topped the deal: Dell’s $67 billion purchase of data storage company, EMC, in 2015 and Blizzard’s Activision of Microsoft for $68.7 now. billion acquisitions also in progress.

So who are these companies, what do these deals do and why is it such a big deal?

What does Broadcom do?

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Broadcom is making a big baller move here, but how does a company that fly under the radar have the weight to make a deal of this size? Well, Broadcom’s logo may not be on the back of your iPhone or Android, but they design and manufacture semiconductor (or the chip) that is the brainchild of these powerful devices. Their chips can also be found in cars, gaming consoles, computers and medical devices. It’s easy to see how the chip industry is big business.

Broadcom’s business extends beyond this to areas such as wireless connectivity, broadband and 5G infrastructure. They are one of the biggest behind the scenes players of the ubiquitous ‘cloud’ by providing critical electronic components to Google’s cloud and Amazon’s AWS.

Not only do Broadcom have a lot of iron in the valuable fire, but they’re also pretty good at what they do. They generate huge cash flow with $28.50 billion in revenue as of the end of January 2022, with an impressive operating profit margin of 34.68%. Simply put, Broadcom generates a lot of cash with healthy margins.

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global chip shortage

Has been at the center of an ongoing Microchip shortage at Broadcom semiconductor space. You’ve probably noticed that the lead times for electronics have gotten crazy in the last few years. If you order a new MacBook from Apple, you will be lucky if it is delivered to your doorstep within a few months. In some cases it is literally taking years for a new car order to be filled. There are a lot of supply chain issues induced by Covid that have compounded the problem, but a large part of it has been the lack of microchips.

While much of the world has returned to normal, a strict lockdown is still in place in China, the world’s major manufacturing hub for these chips. With massive stalled demand and backlog orders, the shortfall is likely to improve over time, but will take some time to fully resolve.

The CEO of Broadcom Hock Tan seems to have done a better job than many in navigating this problem. In a quarterly earnings call late last year, he explained that he had purposefully halted supply and shifted many of his customers to long-term, non-cancellable deals. This strategy is intended to limit the impact of short-term supply and demand fluctuations on the company’s bottom line, and this play for VMWare is another step in that direction.

about vmware

Okay, so if you’ve never heard of Broadcom before, I can almost guarantee you’ve never heard of VMware. The VM in the company’s name stands for Virtual Machine, and it is this area (known as virtualization) for which the company is best known. Along with virtualization technology, VMWare provides various cloud computing solutions for businesses.

Virtualization is not very well known in the consumer world but it is very important when it comes to company IT infrastructure. A virtual machine is like a “computer within a computer”. If you’ve ever had to remotely log into a work device via your own device, it’s probably done using software from VMWare or their main competitor, Citrix. The technology allows you to operate a separate computer ‘virtually’ without having to sit at that computer. So if you have a desktop PC in your office, you can log in at home using your laptop. What you see on the screen of your laptop will be exactly the same as if you were sitting at your work desktop.

This technology has some huge advantages for things like remote work, but it goes much further than that. The ability to run multiple virtual machines from a single large server can be more cost-effective than multiple smaller servers serving different employees.

It also offers huge benefits from the security point of view. Virtual machines can create a secure ‘sandbox’ environment for testing upgrades or changes to IT infrastructure. This allows companies to test and review before launching upgrades that may end up breaking everything!

The reason Broadcom is willing to pay big bucks for VMWare is twofold. Firstly, it allows them to expand from the manufacturing business to the software business. Generally speaking, software is a great business model. Customers sign up for monthly or annual plans, so it creates consistent cash flow with predictable operating costs. There’s a reason every single company in the world wants you to sign up for a monthly subscription these days!

Secondly, VMWare is the largest company in this space. With this acquisition, Broadcom will not only be buying a spot on the table, they will enter the game as the biggest player in the world. This would make Broadcom an even more compelling story with the potential to generate revenue on both the hardware and software components of the industry.

deal

We know the deal is huge, but what does the $61 billion headline mean for VMWare investors? Essentially Broadcom has offered to buy each share at the exchange for a cash price of $142.50, or $0.252 in Broadcom. store For every 1 VMWare share. VMWare is not immune to instability Which plagued the tech sector in 2022, and was trading at around $95 per share in the days leading up to this announcement.

Viewed from the top, it looks like a very attractive offering at around 50% premium above the market price. Long-term holders may not be as excited about the deal, considering that VMWare was trading at a high of $203 in early 2019, and has been hovering around $140 for most of the past 2 years.

Investors who are bullish on Broadcom’s long-term plans may take advantage of a lucrative entry into the stock through a share swap, while those who are not positive will see this as a good opportunity to cash out.

As with any merger or acquisition of this size, this represents a big payday for investment banks. Most of the big names are represented in the announcement, with Goldman Sachs and JPMorgan Chase working in favor of VMware and Barclays, Bank of America, Credit Suisse, Morgan Stanley and Wells Fargo. Broadcom Representation.

The acquisition is not expected to be completed until 2023 and interestingly, VMWare has inserted a 40-day go-shop clause in the deal, which allows them to entertain rival bids during that period.

Get in on the action

If nothing else, the deal highlights huge investment opportunities that can be found in less obvious places. We all know the big names in Silicon Valley like Apple and Google, but often the majority of their products, infrastructure, and services are built on technology and hardware made by companies like Broadcom and VMware.

We at Q.ai have been on this for a while, which is why we made a limited edition Global Microchip Shortage Investment Kit. It uses a combination of AI and expert human asset management to find investments that benefit from the ongoing chip shortages around the world. you can also turn on portfolio security To help protect against future market volatility.

Download Q.ai for iOS today For more great Q.ai content and access to over a dozen AI-powered investing strategies. Start with only $100. No fees or commissions.

Credit: www.forbes.com /

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