[Insights] Broadcom Completes VMware Acquisition, Software Business Expected to Account for 40-45% of Its Revenue

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After obtaining approval from Chinese regulatory authorities at the end of November, Broadcom, a leading IC design company, has officially completed the acquisition of VMware, a prominent player in cloud computing. This strategic move propels Broadcom into the competitive cloud market, with software becoming a substantial part of its revenue. This trend of IC design companies, including AMD, Qualcomm, and Nvidia, venturing into software acquisitions continues to reshape the industry landscape.

Broadcom announced the acquisition of VMware on May 26, 2022, through a cash and stock transaction valued at USD 61 billion. After obtaining approvals from global regulatory authorities, including the EU, UK, South Korea, and Japan, the final conditional clearance from Chinese authorities was secured. This clearance involved ensuring compatibility between VMware server software and Broadcom hardware competitors’ products. The official announcement of completion came on November 22, 2023, following approval from Chinese authority. The final total transaction value came to USD 69 billion.

VMware, known for its expertise in cloud computing and virtualization software, separated from Dell in late 2021. With a customer base exceeding 400,000, it competes with Nutanix and Cloud Software Group. VMware’s core service lies in multi-cloud management, streamlining the integration of cloud resources from various vendors. It enables customers to manage multiple public clouds on a unified platform. The VMware platform significantly reduces the time needed for data migration to different public clouds, from 45 months to approximately 2.5 months.

Broadcom’s Software Business Soars to 40-45% Share after Acquisition, Ventures into Cloud and AI Markets

In 2023, VMware is expected to dominate the server virtualization market with a market share exceeding 70%. VMware’s strategic plan involves increasing the sales share of subscription services and cloud services from 25% in 2021 to 40% by 2025. With Q2 2023 revenue of USD 3.41 billion, almost double the size of Broadcom’s software business, the merger positions Broadcom’s software business to account for 40-45% of the total revenue.

This May, Broadcom CEO Tan Hock Eeng publicity stated that his company is committed to an annual investment of USD 2 billion in VMware’s R&D. Following the acquisition, Broadcom’s software division will be rebranded as VMware, and a shift from perpetual software licenses to subscription and SaaS models is planned. Broadcom aims to increase VMware’s EBITDA from USD4.7 billion in the 2022 fiscal year to USD 8.5 billion within three years.

Besides Broadcom’s entry into the cloud market through VMware, TrendForce also highlights VMware’s significance as a key partner for NVIDIA. The expanded strategic partnership, announced in August 2023, resulted in the establishment of Private AI Foundation with NVIDIA. Built on the VMware Cloud Foundation, the Private AI Foundation is a platform that allows enterprises to customize models and deploy Generative AI applications. The acquisition positions Broadcom to tap into NVIDIA’s AI ecosystem, providing an opportunity to join the NVIDIA AI server supply chain and explore the immense potential brought by AI.

Tech Giants Embrace Ecosystem Competition as IC Design Firms Dive into the Software Industry

To enhance customer loyalty, major companies including Apple, Microsoft, Google, have progressively taken part in ecosystem competition in recent years. These companies have successfully established robust ecosystems. At the same time, IC design companies are gradually venturing into the software industry, shifting the focus from mergers within the IC design sector to mergers in the software industry. In addition to Broadcom acquiring VMware, notable instances in 2022 include AMD’s acquisition of data center platform provider Pensando, Qualcomm’s purchase of automotive software companies Veoneer and Arriver, and NVIDIA’s takeover of software-defined storage(SDS) company Excelero.

For Broadcom, strategic acquisitions have been a recurring theme since the failed attempt to acquire Qualcomm in 2018, after former U.S. President Donald Trump blocked it with national security concerns. Notable acquisitions include the USD18.9 billion purchase of mainframe service company CA Technologies in 2018, the USD 10.7 billion acquisition of the security division of Symantec in 2019, and the unsuccessful attempt to acquire statistical analysis software company SAS Institute for USD15-20 billion in 2021.

Buying software companies provides Broadcom with the advantage of leveraging cross-selling. This enables the promotion of its products, such as compute offload business, server storage connectivity, fiber optics, Jericho routers, and Tomahawk switches, to enterprise customers adopting solutions from these software companies.

(Image: Broadcom)