Broadcom’s self-established deadline for its acquisition of VMware is fast approaching and the deal is on track to potentially close by the end of Broadcom’s fiscal year in October. I don’t make this claim lightly: the acquisition has received provisional sign-off from various national trade, competition and antitrust bodies that have looked at the potential for substantial lessening of competition in their respective markets.
The European Commission announced its approval of the proposed acquisition on 12 July under the EU Merger Regulation. And, according to Broadcom’s press release on the same day, the company had received “legal merger clearance in Australia, Brazil, Canada, South Africa and Taiwan, along with foreign investment control clearance in all necessary jurisdictions”.
With a provisional conclusion from the UK Competition and Markets Authority (CMA) that the acquisition doesn’t materially reduce competition in the supply of input and output hardware and switches in the UK, it looks like few hurdles stand in the way of Broadcom claiming its latest software jewel.
But the old proverb says not to count your chickens before they hatch, so the company is addressing lingering speculation about the progress and future of VMware in the Broadcom family by switching focus to its solid foundations. In a press release in May 2023, Hock Tan, Broadcom’s president and CEO, reiterated the basis of the deal: “The combination of Broadcom and VMware is about enabling enterprises to accelerate innovation and expand choice by addressing their most complex technology challenges in this multicloud era”.
Transparent Intentions
The positive signs from these competition and antitrust agencies suggest a successful approach by Mr Tan and his senior leadership team in addressing the concerns of regulators. It’s a journey that has required learning from past mistakes, as the CEO attested during our podcast discussion, resulting in a more upfront and transparent stance in articulating Broadcom’s long-term intentions for VMware.
Most telling from the summary findings of the CMA and European Commission is the assessment of the market dynamics and the products in Broadcom’s portfolio that instigated the competition review. The European Commission highlighted positive feedback from market participants and the firm’s commitment to protecting open access to ensure continued interoperability with competing hardware solutions, alongside simultaneous access to information for third parties.
In the outline of its investigation, based on discussions with customers, partners, rivals and other industry insiders, the UK’s CMA came to a similar conclusion.
Reassuring Customers by Reinforcing Foundations
In a blog published in July 2023, Mr Tan outlined Broadcom’s evolutionary approach to delivering customer value; a move that hinges on long-term product development and technology investment. The article was a timely step to shift the narrative to Broadcom’s reputation for meeting the specific technology demands of its customers at the time of actual need. This vision also puts focus on research and development, investing in products that grow in tandem with customers and that improve their capabilities.
In the article, Mr Tan backs an approach we hear from other infrastructure, software and services providers: listening to and working with customers and partners to build out and advance solutions, steering clear of the practice of “rip and replace”.
The CEO asserts that the ethos of Broadcom’s strategy is that, like a fine wine, its products get better with time, evolving through many generations of technology. He doesn’t give much credence to the notion that technology is only effective if it’s disruptive, and fired back at criticism of Broadcom’s lack of investment in research and development with three responses.
The first is laying claim to producing industry-leading products that last. According to Mr Tan, Broadcom’s Wi-Fi hardware products are 40 times faster than just over a decade ago. The second is that the firm has proven capacity for supporting leading organizations in building out their IT operations, with long-standing clients including BNP Paribas, Dell and HSBC. The third response is that Broadcom is a member of industry alliances that relate to its portfolio, being instrumental in market-shaping decisions, especially the expansion of shared spectrum for Wi-Fi in 2020, just prior to the introduction of Wi-Fi 6E, which allows for faster speeds and more capacity.
Spending $5 billion annually on research and development is no small sum and shouldn’t be easily dismissed. Similarly, should the VMware deal get full approval, Broadcom is set to spend an additional $2 billion a year to help unlock VMware’s customer value.
During our podcast interview, Mr Tan said the value Broadcom would add for VMware was investing to help more customers adopt the VMware unified stack. Doing so would simplify the deployment and operations of workloads, no matter the underlying infrastructure or cloud platform. As such, the investment plan is to be equally split between research and development efforts and accelerating deployment of VMware solutions.
Changes in Approach from Customers
Is the approach taken by Broadcom the right one?
Our latest Senior Leadership IT Investment Survey confirmed a mix of investment priorities, with responses split between business- and technical-facing roles. But business and operational transformation remains important to all. There’s a lot of interest in cloud services, security management and application services across all platforms; better network connectivity; and appropriate support for data analytics, artificial intelligence and machine learning. IT decision-makers are also on the lookout for greater automation, improved performance and better cost control and capacity management.
We’re also seeing wariness of overhyped capabilities starting to bubble through. Organizations have been burnt by technology that didn’t live up to claims. And despite hearing the push for simplification, enterprises are still stuck with complexity in their application, tool and infrastructure stacks. But some are beginning to recognize they’ve been part of the problem, hastily adopting technology solutions without clear sight of a relevant use and dumping important expert roles.
As a result, there’s been a realization of the need for a more mature approach to identifying risks, support for open-source and standards, security built from the ground up and expert guidance. Having an exit strategy no matter the tool or application and knowing what roles really need to be involved now holds sway.
On the supplier front, firms are looking for trusted relationships, operational resilience and reliability, along with a track for continued innovation and design support. A breadth of tools, focus on usability and customer experience, multicloud capability and a well-built integration and interoperability framework are all table stakes.
All these findings seem to fit with Broadcom’s evolutionary approach to innovation, plans for investment in research and development, as well as Mr Tan’s vision for progressing Broadcom’s infrastructure and software portfolio alongside that of VMware.
For customers focusing their IT strategy on multicloud, Broadcom intends to heavily invest in making VMware an agnostic leader in multicloud solutions. Our research also shows that customers want better experiences with their software suppliers, so it’s notable that Broadcom plans significant spending to improve VMware’s customer experience.
A Glimpse of the Future from Broadcom’s Fiscal Results
Competitively, there isn’t always a significant difference in the product road maps of leading peers in markets where Broadcom operates. Certainly, the hefty annual investment in research and development belies the comments of its critics, and Mr Tan’s acquisition plans, coupled with the provisional findings of the EU and UK competition authorities, should ease concerns about VMware’s community and ecosystem.
The latest quarterly results for Broadcom’s fiscal 2023 also provide good reason for confidence in the stewardship of Mr Tan. Revenue reached $8.7 billion in its fiscal 2Q23, up 8% year-on-year with a pre-tax profit margin of 65%. The semiconductor business, which makes up 78% of total revenue, rose 9% year-on-year and is expected to expand thanks to growth in artificial intelligence networks and customers deploying artificial intelligence workloads.
The infrastructure and software business, which accounts for the other 22% of Broadcom’s revenue, grew only 3%, although infrastructure revenue has seen stellar growth over the past five quarters, driven by sales to web companies, service providers and enterprises.
Broadcom has a solid wireless connectivity and 5G component business, which experiences seasonal fluctuations in revenue. It saw revenue fall 9% year-on-year. The company continues to show discipline in managing inventory, mitigating supply chain concerns affecting the industry.
Lastly, Mr Tan’s article makes an interesting competitive distinction based on the exceptionally high proportion of engineers in its workforce. This, along with the value from incremental product innovation that adapts to the real-time needs and maturity of customers, is a combination that I believe bodes well for VMware.
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