• The proposed Broadcom and VMware deal could create a conglomerate effect in the server virtualization market.
• The uncertainty of the deal will impact customers on their decisions on current and future VMware investments, resulting in some customers switching to competitors.
Broadcom has a Checkered M&A History
GlobalData previously provided commentary questioning if Broadcom had the right profile, but more importantly, the right pedigree to be the company acquiring VMware. After all this is one of the largest potential acquisitions resulting in VMware being acquired by Broadcom for approximately $61 billion in a cash-and-stock transaction, together with VMware’s net debt of $8 billion.
Firstly, Broadcom has always possessed this checkered history in acquisitions, both in terms of itself being acquired and the company making acquisitions. But this is nothing new in the M&A tech world. However, Broadcom’s past history on acquisitions speaks volumes. In particular, its acquisition of the cybersecurity player Symantec in 2019 for $10.7 billion in cash questioned Broadcom’s seriousness to move into cybersecurity, having subsequently sold Symantec’s cybersecurity services business a year later to Accenture.
The Deal Could Impact the Server Virtualization Market
VMware is a credible player with a solid foundation and strategy to drive its network, cloud, virtualization, and security business. Therefore, for this deal to work, irrespective of the regulatory concerns over fair play, it will be critical that Broadcom provides the necessary support and investment in VMware for the acquisition company to not only maintain its brand equity but also operate with a level of autonomy.
However, there is a major stumbling block in the form of regulatory approval questioning if the acquisition constitutes fair play. The interested parties, including the Federal Trade Commission’s (FTC), European Commission (EC), and Competition and Markets Authority (CMA) in the UK, have all honed in on conducting a review on the planned acquisition. The FTC stated that its review of Broadcom is said to focus on “conglomerate effects” of the combination. The CMA’s investigations are somewhat firmer with the authority expressing a concern on the UK server market. In particular, CMA’s executive director David Stewart issued a statement this month, which highlighted concerns that the acquisition might impact competitors from the supply of hardware components to the server market, leading to less innovation and speed to market. This stems from market-affecting scenarios that the combination of Broadcom’s hardware, together with the server virtualization capabilities of Vmware, will prevent the supply to competitors of Vmware-compatible hardware components.
In GlobalData’s view, there is an element of a conglomerate effect created by the potential Broadcom and VMware deal in the server segment. VMware also brings more to the table than Broadcom, and potentially Broadcom will get to use VMware’s strong cloud and virtualization capabilities to its competitive advantage possibly in a unfair playing setting. The global server virtualization market is also expected to grow to $15 billion plus by 2030, with a CAGR of 7-8%, and this will be influenced by high-speed data centers and increased cloud computing adoption; and so long-term, the deal could have a impact and affect the competitive playing field in the server virtualization space that consists of players like Oracle, Amazon, Google, Huawei, IBM, Citrix, and Microsoft.
Other areas of the Broadcom and VMware business covering cybersecurity will create less of an issue due to the acquisition creating less of a monopoly due to the relative market position of both players in the cybersecurity segment and existing portfolio overlap in areas like Broadcom’s (Symantec) product lines across SASE and extended detection and response.
Danger of Customer Churn
However, what the market fails to acknowledge is that the effects of the uncertainty is potentially damaging brand equity – there are significant amount of VMware customers grappling with the state of affairs on their current and future VMware investments. This will no doubt give an opportunity to competitors across both Broadcom and VMware key areas of business where they can take customers.