For Broadcom to maximize its planned acquisition of VMware, industry analysts say the chipmaker should do something it hasn’t done with its two previous software acquisitions: invest in the business and allow it to continue to innovate.
Broadcom on May 26 announced it would buy VMware for $61 billion. The offer includes a “go-shop provision” that enables VMWare to solicit competing offers for 40 days, so it’s not yet a done deal. Nevertheless, the announcement sent shockwaves throughout the industry -- not only because of the price tag, but also because of the potential impact to so many enterprises and data center operators.
VMware has more than 500,000 customers globally, using everything from virtualization technology to tools for deploying and managing virtual machine (VM)-based and container-based applications in hybrid, multi-cloud environments. Such a massive presence has prompted industry analysts and VMware customers alike to ponder what Broadcom's acquisition means for VMware’s future and for the customers themselves.
“(Broadcom is) paying a hefty premium for VMware, which basically means it better not do anything to disrupt the money that VMware brings,” said Ashish Nadkarni, group vice president of IDC’s Worldwide Infrastructure Practice, in an interview with Data Center Knowledge. “If Broadcom is smart, which I know it is, it will leave VMware alone and let VMware be VMware.”
Broadcom a “Ruthless Acquirer”
Broadcom’s reputation precedes it, however. After Broadcom purchased CA Technologies in 2018 and Symantec in 2019, customers of the two companies “saw massive price hikes, worsening support and stalled development,” according to a blog post by Forrester Research.
When describing Broadcom’s acquisition strategy, Broadcom CEO Hock Tan has stated that he looks for businesses that hold a strong market position and can be made more profitable without pouring in huge investments, a Bloomberg story said. In fact, cutting expenses is a key strategy for Broadcom post-acquisition. Financial analyst firm Sanford C. Bernstein has noted that Broadcom cut the cost base at CA and Symantec by 60 to 70%, the article said.
“Broadcom has been known as being a ruthless acquirer in technology circles, not for any other reason but for being very focused on cost optimization,” said Vladimir Galabov, Omdia’s head of the Cloud and Data Center Research Practice, in an interview with DCK.
What VMware Brings to Broadcom
Historically, Broadcom has focused on semiconductors, particularly in storage and networking, but it has diversified its business with profitable enterprise software companies in recent years.
VMware, which spun out from Dell in 2021 and is transitioning from upfront license payments to a subscription and software-as-a-service model, earned a net income of $1.82 billion and saw its yearly revenue grow 9% to $12.85 billion during the 2022 fiscal year. With the addition of VMware, Broadcom’s combined enterprise software business would make up nearly half – 49% -- of Broadcom’s $40 million in annual revenue.
If the deal closes, VMware would provide Broadcom a steady revenue stream from its virtualization software business that includes server, storage and networking virtualization and Virtual Desktop Infrastructure (VDI) technology.
VMware has been trying to capitalize on its installed base of customers to capture a bigger share of the multi-cloud and applications space. That strategy includes Tanzu Kubernetes software for deploying and managing containerized apps and Project Arctic, the next evolution of its flagship vSphere server virtualization software which will enable IT administrators to manage all the resources across multiple public and private clouds from a single console.
“VMware has a really experienced leadership team. They really understand the market, and they’ve put a lot of things in motion,” Gary Chen, IDC’s research director of software defined compute, told DCK.
Will VMWare’s Leaders Continue to Drive Their Own Decisions?
The big question, said Omdia’s Galabov, is whether VMware’s leaders will be allowed to keep all those things in motion, or will Broadcom seek to optimize costs and maximize VMware’s profits.
Analysts say VMware should continue to invest in research and development, sales and marketing and professional services, particularly in the high-growth market to provide enterprises the software to run and manage container-based applications.
VMware was late to the container software market and needs to continue to invest in it to capture a larger share of a market that’s now dominated by IBM’s Red Hat, Galabov said.
In fact, VMware should emulate Red Hat’s consultative approach by creating a professional services organization to help enterprises develop and implement a strategy to migrate to cloud-native apps built on containers, he said. VMware could tap its existing enterprise customers who have not yet considered containers yet.
“This could be VMware’s strong point because it works with virtually every company in the world,” Galabov said. “To be successful will require a consultative approach. It is costly to launch a new discipline, and it’s not going to immediately bear fruit.”
IDC’s Chen agrees with Galabov, noting that part of VMware’s success is it invests in research and development to create bleeding-edge technology. If Broadcom does slash VMware’s R&D budget, it won’t affect Tanzu immediately, but it could affect future plans, he said.
“VMware doesn’t have a choice but to go containers and cloud native because that’s where the whole industry is going,” Chen said. “Everyone is looking for modernization, so there has to be a huge amount of R&D there. It can’t lose the innovation edge and stand still. It has to keep up with their competitors and also invest in sales and marketing because it’s a new product for VMware.”
Analysts say the concern might be much ado about nothing. Broadcom announced that its existing Broadcom Software Group, which consists of CA and Symantec software, would be rebranded and operate as VMware. That could suggest that VMware leaders could continue to run their own show.
VMware has been through two previous acquisitions. When it was first purchased by EMC in 2004 and when Dell acquired EMC in 2016, VMware was left alone and given the freedom to continue to innovate its product portfolio. Broadcom could do the same and give VMware the autonomy to operate business as usual, IDC’s Nadkarni said.
“It could be a non-event. When VMware was acquired in the past, it ultimately didn’t have an impact on customers,” Chen said. For some customers, it was a bonus because it provided better integration with Dell, he said.
Galabov said it is possible a VMware acquisition will change the culture in Broadcom and allow VMware to continue to operate on their own. But it’s nothing Broadcom has done before, he said.
“Most likely, Broadcom has made some promises it will not completely destroy the company. I think VMware’s core business is very safe,” he said. “I’m just not sure that Broadcom is willing to make the investment required to make Tanzu the vSphere of the container world.”
Customer Impact for The Industry
It’s too soon to know what the impact will be for VMware’s customers and what Broadcom’s strategy will be. But if Broadcom’s software acquisition history is a guide, VMware customers could face potential price hikes, analysts say.
In the aftermath of Broadcom’s acquisition of CA, customers were asked to pay more, and in some cases, significantly more for software licenses, says Forrester Research Senior Analyst Naveen Chhabra in an interview with DCK. In addition, the cost of support contracts increased while support levels dropped. Broadcom also halted plans on CA’s product roadmap.
“If history is an indication of the future, then all three are not good indicators,” Chhabra said. “If Broadcom executes from the same playbook, these are the three concerns that existing customers can expect to face.”
That uncertainty opens up opportunities for competitors, Chen says. That includes Nutanix, IBM Red Hat and the major public cloud players like Amazon Web Services, Microsoft Azure and Google Cloud, who can try to convince VMware customers to migrate off VMware and onto their cloud.
“You get people thinking, ‘Maybe I should hedge my bets? What are my options if this ends up not being good for me?’ Competitors will try to exploit that,” Chen says.