Chipmaker Broadcom to buy cloud services company VMware in $61 billion deal

May 26 (Reuters) – Broadcom Inc (AVGO.O) said on Thursday it would acquire cloud computing company VMware Inc (VMW.N) in a $61 billion cash and stock deal , the chipmaker’s biggest and boldest bid to diversify its business. in business software.

The acquisition is the second largest announced globally so far this year, after just Microsoft Corp’s (MSFT.O) $68.7 billion deal to buy video game maker Activision Blizzard Inc ( ATVI.O).

Broadcom’s offer price of $142.50 per VMware share represents a nearly 49% premium to the stock’s last close, when talks of the deal were first announced on 22 may. Broadcom will also assume $8 billion of VMware’s net debt.

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Shares of the chipmaker fell nearly 1% in premarket trading on Thursday, while VMware rose 1.3%.

Broadcom chief executive Hock Tan, who has made his company one of the world’s largest chipmakers through acquisitions, brings his trading manual to the software industry.

In one fell swoop, the deal will nearly triple Broadcom’s software revenue to about 45% of its total sales.

Broadcom will be instantly validated as a major software player with the acquisition of VMware, said Daniel Newman, analyst at Futurum Research.

“Having something like VMware…will open a significant number of doors that their current portfolio probably isn’t opening for them,” Newman added.

The deal is also a coup for Dell Technologies Inc (DELL.N) chief executive Michael Dell, who spun off VMware from the computer maker last year.

Michael Dell owns a 40% stake in VMware, while his backer Silver Lake, a private equity firm, owns 10%.

VMware will be allowed to solicit bids from competing bidders for 40 days as part of the agreement.

Broadcom’s pivot to software began after its bid to acquire mobile chip giant Qualcomm Inc (QCOM.O) was blocked by former US President Donald Trump in 2018 on national security grounds.

Since then, Broadcom has taken over enterprise software company CA Technologies Inc for $18.9 billion and acquired the security division of Symantec Corp for $10.7 billion. It also explored acquiring analytics software company SAS Institute Inc, but did not make a bid.

Broadcom then reduced the costs of the acquired companies. He cut the CA and Symantec companies’ sales and marketing budgets from about 29% of their revenue to 7%.

VMware dominates the market for so-called virtualization software, allowing enterprise customers to run multiple applications on their servers.

This activity has begun to slow as companies find new tools to operate through cloud computing, prompting VMware to seek new offerings, including through a partnership with Amazon.com Inc (AMZN.O).

Broadcom doesn’t usually spend a lot on research and development, said Keith Townsend, an analyst at consultancy CTO Advisor.

That could bode ill for new product launches at VMware, added Townsend, who also had a brief stint at VMware as an enterprise data center architect.

“As I talk to customers, they desperately need innovation from companies like VMware.”

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Reporting by Chavi Mehta in Bengaluru, Krystal Hu in New York and Jane Lanhee Lee in San Francisco; Editing by Aditya Soni and Shounak Dasgupta

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