Broadcom’s $69 Billion Acquisition of VMware

By Arnov Vellakkat and Stefan Ruth

Overview

Acquirer: Broadcom (NASDAQ: AVGO)

Target: VMware (NYSE: VMW)

Transaction Size: $69 Billion

Expected Close Date: Q4 2023

In May of 2022, Broadcom Inc. announced its intention to acquire VMware for $61 billion, however, given the potentially monopolistic nature of the acquisition. The deal faced pushback from American and European regulators, worried about the impact this could have on the cloud computing market. Despite this, on the 19th of July, UK regulators have green-lit the acquisition with European and other major economies already having approved, with American regulators likely to follow suit given the FTC-mandated pre-merger period has expired.

The deal entails Broadcom’s existing shareholders owning approximately 88% of the merged company, VMware shareholders will have right to exchange their shares for $142.50 or 0.2520 shares in Broadcom. Moreover, Broadcom will take on VMware’s existing debt, meaning that the value of the deal totals $69 billion. This represents a 38% premium over VMware’s market cap in 2022, significantly above what is typically seen.

Broadcom is a prominent global technology company based in San Jose, California, with a diversified product portfolio, with Broadcom becoming a major player in the semiconductor and infrastructure software industries. Being the fourth largest semiconductor producer by market cap, only recently overtaken by Samsung. Given the ever-evolving nature of the cloud computing and generative AI industries, Broadcom intends to enter the space through its acquisition of VMware. A firm specialized in cloud computing and visualization, offering a suite of products which have revolutionized data center management. With its specialization in semiconductors and VMware’s specialty in cloud computing, Broadcom intends to tailor its semiconductors to the data center management and cloud computing, highly lucrative fields in the semiconductor industry, currently dominated by Nvidia due to their chips’ superiority in these fields.

Analysis

This report aims to assess the effects of the acquisition on Broadcom’s operations and provide insight as to whether the deal is worthwhile. An intrinsic valuation was conducted, due to the volatility and variance in the semiconductor industry, a reliable trading comparable model could not be determined. Therefore, we have chosen to move forward with a DCF analysis entailing an intrinsic valuation of Broadcom presently, without its acquisition of VMware, and an analysis entailing a valuation of Broadcom with its acquisition of VMware, not accounting for any possible synergies which may lead to increased revenues. Both were conducted using the perpetuity growth method.

This analysis provided a current valuation of $591 billion, whereas the combined valuation fell to $435 billion. The present value of cashflows fell despite the acquisition of VMware, due to the increased WACC, as the deal is at least partially debt-financed, resulting in significant additional debt on Broadcom’s balance sheet. As a result, at the new discount rate, the terminal value of unlevered cashflows must increase from $601 to $816 billion, to maintain its current valuation. Therefore, the acquisition of VMware must result in synergies contributing to an increase in unlevered cashflows of approximately 36% at a minimum.

Despite paying an $8 billion premium, Broadcom anticipates an increase in EBITDA in the three years following the transaction. Considering their 2009 acquisition of Symantec, and enterprise security and business software divisions of CA Technologies, Broadcom is conducting a concerted effort to expand into the cloud computing and data center market. With the existing synergies developed with previous acquisitions, we are confident in Broadcom’s ability to develop significant synergies and economies of scale, allowing their continued growth. Despite this, it is important to note that in the rapidly developing cloud market, VMware is still faced with significant competition, and failures to compete will result in drastic losses for Broadcom.

Conclusion

Broadcom’s acquisition of VMware presents a valuable opportunity to expand in the cloud computing and data center markets. With proper management, significant synergies could be developed considering the vertical nature of the integration, with Broadcom producing the chips which will power VMware’s software. Considering Broadcom’s management’s expertise in these types of acquisition and the existing infrastructure for the success of the acquisition, supported by their previous acquisitions, we are confident in the development of these synergies.

With software representing a large share of Broadcom’s revenue, their operating margin is expected to improve resulting in improved cashflows, which allows them to strengthen their market position. Resulting in increased earnings, allowing for greater benefits to shareholders, through reinvestment, buybacks, or dividends. All in all, the acquisition presents significant upsides for Broadcom, though failure will result in significant losses.

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