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Broadcom to acquire VMware in $61bn cash-and-stock deal

27 May 2022


Broadcom Inc, a global leader in design, development and supply of semiconductor and infrastructure software solutions, today announced an agreement to acquire all of the outstanding shares and VMware Inc, a leading innovator in enterprise software, in a cash-and-stock transaction that values VMware at approximately $61 billion.

VMware, a leading provider of multi-cloud services for all apps, pioneered virtualization technology, an innovation that positively transformed x86 server-based computing. VMware then created the software-defined data center and played a leading role in virtualising networking and storage, before evolving to become a hybrid cloud and digital workspace leader. 
Following the closing of the transaction, the Broadcom Software Group will rebrand and operate as VMware, incorporating Broadcom's existing infrastructure and security software solutions as part of an expanded VMware portfolio.
The combined company will provide enterprise customers an expanded platform of critical infrastructure solutions to accelerate innovation and address the most complex information technology infrastructure needs, Broadcom stated in a release. 
"Building upon our proven track record of successful M&A, this transaction combines our leading semiconductor and infrastructure software businesses with an iconic pioneer and innovator in enterprise software as we reimagine what we can deliver to customers as a leading infrastructure technology company. We look forward to VMware's talented team joining Broadcom, further cultivating a shared culture of innovation and driving even greater value for our combined stakeholders, including both sets of shareholders," Hock Tan, president and chief executive officer of Broadcom, said.
"VMware has been reshaping the IT landscape for the past 24 years, helping our customers become digital businesses. We stand for innovation and unwavering support of our customers and their most important business operations and now we are extending our commitment to exceptional service and innovation by becoming the new software platform for Broadcom. Combining our assets and talented team with Broadcom's existing enterprise software portfolio, all housed under the VMware brand, creates a remarkable enterprise software player. Collectively, we will deliver even more choice, value and innovation to customers, enabling them to thrive in this increasingly complex multi-cloud era," Raghu Raghuram, chief executive officer of VMware, said.
"VMware has long been recognized for its enterprise software leadership, and through this transaction we will provide customers worldwide with the next generation of infrastructure software. VMware's platform and Broadcom's infrastructure software solutions address different but important enterprise needs, and the combined company will be able to serve them more effectively and securely," Tom Krause, president of Broadcom Software Group, said.
"Together with Broadcom, VMware will be even better positioned to deliver valuable, innovative solutions to even more of the world's largest enterprises. This is a landmark moment for VMware and provides our shareholders and employees with the opportunity to participate in meaningful upside," Michael Dell, chairman of the VMware Board, said.
Broadcom expects the transaction to add approximately $8.5 billion of pro forma EBITDA from the acquisition within three years of closing. Pro forma for each company's fiscal year 2021, software revenue is expected to account for approximately 49 per cent of total Broadcom revenue.
Under the terms of the agreement, which has been unanimously approved by the boards of directors of both companies, VMware shareholders will elect to receive either $142.50 in cash or 0.2520 shares of Broadcom common stock for each VMware share. The shareholder election will be subject to proration, resulting in approximately 50 per cent of VMware's shares being exchanged for cash consideration and 50 per cent being exchanged for Broadcom common stock.
Based on the closing price of Broadcom common stock on 25 May, the total $138.23 per-share consideration represents a 44 per cent premium to the closing price of VMware common stock on 20 May 2022, the last trading day prior to media speculation regarding a potential transaction, and a 32 per cent premium to VMware's unaffected 30-day volume weighted average price (VWAP). Upon closing of the transaction, based on the outstanding shares of each company as of the date hereof, current Broadcom shareholders will own approximately 88 per cent and current VMware shareholders will own approximately 12 per cent of the combined company on a fully diluted basis.
Michael Dell and Silver Lake, which own 40.2 per cent  and 10 per cent of VMware shares outstanding, respectively, have signed support agreements to vote in favor of the transaction, so long as the VMware board continues to recommend the proposed transaction with Broadcom.
In connection with the transaction, Broadcom obtained commitments from a consortium of banks for $32 billion in new, fully committed debt financing.
Broadcom expects to maintain its current dividend policy of delivering 50 per cent of its prior fiscal year free cash flow to shareholders. The company also expects to maintain an investment grade rating, given its strong cash flow generation and intention to rapidly de-lever.
The transaction, which is expected to be completed in Broadcom's fiscal year 2023, is subject to the receipt of regulatory approvals and other customary closing conditions, including approval by VMware shareholders.
The merger agreement provides for a "go-shop" provision under which VMware and its Board of Directors may actively solicit, receive, evaluate and potentially enter negotiations with parties that offer alternative proposals during a 40-day period following the execution date of the definitive agreement.
In a separate press release issued today, Broadcom reported a 23 per cent year-on-year increase in its fiscal second quarter (ended 1 May 2022) revenue at $8.10 billion of fiscal year 2022. Net income for the quarter stood at $2.59 billion while adjusted EBITDA came to $5.11 billion.
The company expects fiscal third quarter adjusted EBITDA to be approximately 63.5 per cent of projected revenue guidance of approximately $8.4 billion for the third quarter of its fiscal year 2022.
The Broadcom board of directors also has authorised a new share repurchase programme to repurchase up to $10 billion of its common stock through 31 December 2023. This new share repurchase authorisation is in addition to the share repurchase programme authorised in December 2021, under which Broadcom may repurchase the current remaining $3 billion of common stock through 31 December 2022. 
Barclays Capital Inc, BofA Securities, Inc, Citigroup Global Markets Inc, Credit Suisse Securities (USA) LLC, Morgan Stanley & Co LLC and Wells Fargo Securities LLC are serving as financial advisors to Broadcom. 
Wachtell, Lipton, Rosen & Katz and O'Melveny & Myers LLP are serving as legal counsel to Broadcom, and Cleary Gottlieb Steen & Hamilton LLP is serving as regulatory counsel.
Goldman Sachs & Co. LLC and J.P. Morgan Securities LLC are serving as financial advisors to VMware, and Gibson, Dunn & Crutcher LLP is serving as legal counsel.

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