Under the spotlight of regulatory scrutiny, Broadcom CEO and president Hock Tan has been working to bring clarity to how VMware will thrive in the Broadcom family. What will undoubtedly be a relief to prospective customers, partners and the wider market is that it won’t come at the expense of stifling competition and choice. However, faced with apprehension from various trade, competition and antitrust bodies, Mr Tan and his team have had some convincing to do.
Shortly after Broadcom announced its intentions to acquire VMware on 26 May 2022, CCS Insight published our take (see Insight Report: Broadcom to Purchase VMware for $61 Billion). We viewed the decision as a smart move to shepherd a more diversified hardware and software company with a rounded infrastructure and cloud management story. And, although VMware is certainly a prized asset to acquire, we expected challenges in bringing together silicon, software and services.
A recent CCS Insight podcast discussion with Mr Tan is now available on all major podcast platforms (Apple Podcasts, Google Podcasts and Spotify). It provides a deep dive into the foundations for the acquisition of VMware, with Mr Tan setting out his vision for the deal. The companion report outlining the key points of the discussion is available here.
Broadcom’s Business Foundations Underwrite Its Long-Term Progression
Anyone who follows Broadcom will be well acquainted with its beginnings. Mr Tan joined the company in 2006, not long after it was spun out from Hewlett-Packard’s semiconductor business by private equity acquisition. The company grew rapidly after going public in 2009 as Avago Technologies. Its chipmaking and network infrastructure portfolios were strengthened with well-placed purchases and supported by iconic technology. The acquisition of communication giant Broadcom in 2015 saw it take a name that better reflected the business.
In 2018 and 2019, Broadcom moved toward the enterprise software market and the expansion of its hardware offering with the purchases of CA Technologies, which brought in mainframe software and support services, and Symantec Enterprise Security Business.
Broadcom’s strong reputation for acquisitions has been vital to its progression over the past 17 years, with the firm boasting 22 distinct product lines. Our Insight Report: Fabless Firms Outperform Peers in Bumper Year for Semiconductors highlights how Broadcom’s semiconductor revenue growth trailed behind many peers in 2021. But the numbers under Mr Tan’s command speak for themselves: annual revenue was at $1.4 billion at the start of his stewardship, which turned to $33 billion over 17 years, with research and development reaching double-digit compound annual growth rates.
And Broadcom’s first-quarter results for 2023 rose by 16% from 2022 to $8.9 billion, a promising start that beat analysts’ predictions at a time when many other chipmakers are suffering under the weak market demand.
That said, Mr Tan is keen to quash the notion that acquisition is the only way to grow. Engineering prowess and strong technology are at least as vital as acquisitions — for example, engineers make up 16,000 of the 20,000 employees at Broadcom, and this is reinforced by Mr Tan’s mechanical engineering qualification from the Massachusetts Institute of Technology.
Strong engineering principles aren’t the only assets that Mr Tan cites as qualification for charting VMware’s future. He also highlights the need for shrewdness in selecting, acquiring and investing in companies, helping to secure a strong market presence in specific industries and critical technologies.
VMware’s Multicloud Evolution Boosts Broadcom’s Strategy
Mr Tan doesn’t hesitate when it comes to his intentions for purchasing VMware. The company has a portfolio and strategic direction that he feels aligns well with the operational structure of Broadcom’s business units, which, other than a common platform of support services, are run independently. VMware also has technology that many customers see as essential and that Broadcom can enhance to drive growth opportunities.
There’s clear acknowledgment of VMware’s market and technology potential in the virtualization, hybrid and multicloud fields. After a bumpy start, we believe that the company has a clear line of sight into what’s needed for hybrid or multicloud operations. It also understands the importance of ensuring coherency and reducing the complexity of multicloud architectures.
Both companies are united in jump-starting a new focus on software-defined data centres with greater levels of intelligent automated support. They want to present a unified stack that simplifies the deployment and operations of workloads, no matter the underlying infrastructure or cloud platform. Maintaining a robust pool of talented engineers is vital for both businesses.
Where they differ, and what Mr Tan believes Broadcom can add, is the necessary investment to get more customers adopting the VMware stack. Although it’s a solid portfolio that has had a revamp in product naming conventions, Mr Tan believes it’s underperforming. The streamlining of services, attention to data sovereignty concerns and improved alignment between VMware’s Aria and Tanzu solutions offers an opportunity to boost the company’s numbers in a highly competitive market.
According to Mr Tan, VMware needs the investment to build out a well-rounded, sizeable partner ecosystem and expand the skills that will scale its operations to match the capacity of its products. This will allow it to drive operational productivity, efficiency, ease of use, resiliency and elasticity. We agree with this assessment and are impressed with his intention to invest $1 billion per year for the next three years to achieve this goal.
Broadcom’s CEO and leadership team remain steadfast in their goal of completing the acquisition of VMware by the close of its fiscal 2023. If the deal secures regulatory approvals, the final day of Broadcom’s fiscal year, 30 October, would mark the end of a chapter for VMware and the start of another for a newly expanded Broadcom. But in the current climate of macroeconomic and geopolitical upheaval, nothing is certain.
Muscle Flexing from Regulators
Five or more years ago, such an acquisition — where there’s little product overlap or notable increase in market share — would have been waved through. However, post-pandemic, regulators are more wary of big tech buyouts.
At a time, however, when the UK Competition and Markets Authority and the US Federal Trade Commission are showing concerns about concentration in various cloud markets, Broadcom’s move to acquire VMware is noted by some to be a potential driver of new competition and innovation, which regulators should applaud and support.
Something for Everyone, But Will It Be Enough?
There are many reasons to be hopeful for a successful outcome, not least because Mr Tan has been upfront about Broadcom’s long-term intentions for VMware. The CEO spoke with enthusiasm about the technology industry and the quality of Broadcom’s products, but admitted that his tenure in the driver’s seat hasn’t been without mistakes.
He says, however, that he has learnt from these lessons, and seems attuned to the needs of a market that prioritizes sustainable, intuitive, secure, interoperable and consistent platforms. It’s a position reflected by many in the IT industry, as well as in our enterprise surveys.
Broadcom’s investment goals promise to extend the range of VMware partners, offering more choice and expanding VMware’s operations and market foothold. Its aim of rebranding and repositioning the Broadcom Software group under the VMware brand is recognition of the latter’s strength in the technology and supply chain ecosystem. Customers and partners will be reassured by these aims — and Broadcom will be hoping that regulatory bodies feel the same.
Note: Hock Tan’s comments on investments and plans for VMware are to be understood as referring to future circumstances in which Broadcom has closed its proposed acquisition of VMware.
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