The acquisition will be the biggest move yet in software—but the chip could change the company’s playbook
Software companies may not be as agile now that valuations have come down drastically in the face of a massive sell-off in the market. Combined with Broadcom’s steady growth of free cash flow, this has encouraged the company to try again — in a big way. Businesshala reported Sunday night that the company is in “advanced talks” to acquire VMware.,
The software maker spun off Dell Technologies late last year, sporting a market value of nearly $40 billion before the news. A premium of about 20%, similar to what Broadcom paid for CA, would bring VMware’s price closer to $50 billion.
It will be Broadcom’s biggest acquisition to date, though it will still be less than half what the chipmaker proposed to pay for Qualcomm, before the deal was struck by the White House in 2018. Broadcom’s share price slipped nearly 3% on the news Monday. morning, although initial reactions were generally positive. Bernstein’s Stacey Rasgon cited Broadcom’s record in deals and said “Hawk (Chief Executive Officer Hock Tan) hasn’t done a bad one yet, software or otherwise.”
The deal would also replace Broadcom with a chip maker that deals in software. VMware now generates about $13 billion in annual revenue — nearly twice the size of Broadcom’s current software business. If the deal were completed in Broadcom’s current fiscal year, roughly 45% of the company’s total revenue for the fiscal year ending October 2023 would be from software, based on Wall Street’s current estimates from the two companies. And that’s with Broadcom’s chip side still averaging double-digit annual growth over that time.
But that may depend on how much Broadcom tweaks VMware’s business to fit its own parameters. Software companies typically spend significant sales and marketing dollars pursuing higher growth rates. At an analyst meeting in November, Broadcom stated its preference for a contrasting approach — one that produces mid-single-digit growth with operating margins in the 70% range. VMware typically spends about 32% of revenue on sales and marketing, with adjusted operating margin expected to fall below 30% this year as it works to transition its business to the cloud model.
Broadcom may have something else in mind.
Write Dan Gallagher at [email protected]
Credit: www.Businesshala.com /