China Approves Broadcom's Acquisition of VMware Conditionally

Credit: Broadcom

BEIJING, November 22 (TMTPOST)--U.S. communication chip giant Broadcom (NASDAQ: AVGO) and U.S. software company VMware (NYSE: VMW) jointly announced on Tuesday that the former's $69 billion acquisition of the latter has received approval from regulatory authorities in the world and will be completed on November 22.

On the same day, the State Administration for Market Regulation of China announced the conditional approval of Broadcom's acquisition of VMware. Given that VMware has the highest market share in the global and Chinese non-public cloud virtualization software market, and Broadcom is the largest player in the global and Chinese market of fiber channel adapters and storage adapters, the Chinese regulator required that when the two companies sell related products in the Chinese market, they must not engage in bundled sales in any way without justifiable reasons, nor restrict customers from purchasing or using the above products separately.

The market regulator also requires that after the acquisition, Broadcom must continue to ensure the interoperability of VMware's server virtualization software with third-party hardware, as well as the interoperability of Broadcom products with third-party server virtualization software. According to the announcement, all restrictive conditions will be valid for 10 years and automatically lifted upon expiration.

Broadcom subsequently announced that the transaction has obtained approvals in Australia, Brazil, Canada, China, the European Union, Israel, Japan, South Africa, South Korea and Britain. In the United States, there are no longer any legal obstacles for completing the transaction.

This means that the acquisition is about to be completed, and VMware may be delisted as early as this month.

Broadcom was established in 1991 and is headquartered in the United States. In 2016, it was acquired by Avago Technologies, a Singapore-based company, for approximately $37 billion. Based on the full-year revenue in 2021, Broadcom is the sixth largest semiconductor company in the world. Currently, Broadcom's business mainly includes semiconductor solutions and infrastructure software. The semiconductor solutions cover products for communication networking, broadband and server storage. In the 2022 fiscal year, the chip business accounted for 78% of Broadcom's total revenue, with the remaining coming from the software business.

VMware was founded in 1998 and is headquartered in California, the United States. It is a leading global provider of virtualization and cloud computing infrastructure services. In 2004, the enterprise software and storage company EMC acquired VMware for $625 million, holding an 81% stake. In 2007, EMC partially divested its stake in VMware through an IPO on the New York Stock Exchange.

In 2016, Dell acquired EMC for $67 billion (now DELL EMC), and VMware became part of Dell's business. In November 2021, Dell announced the completion of the divestiture of 81% of VMware's equity, making VMware an independent cloud computing and SaaS virtualization software company once again.

Public information shows that VMware's market share in the global and Chinese non-public cloud virtualization software market was 92%-97% and 22%-27% respectively in 2021, ranking first in both markets.

In May 2022, Broadcom announced its plan to acquire VMware for $61 billion, with half of the amount to be paid in cash and the other half to be exchanged for Broadcom stock. Broadcom will also assume VMware's $8 billion debt, making the total transaction value $69 billion.

When announcing the acquisition of VMware, Broadcom stated that the transaction would diversify its business and combining with VMware would enhance competition in the cloud computing field, allowing enterprise customers to have more choices. Hock Tan, the CEO of Broadcom and a Malaysian Chinese, expressed that he has seen a "booming" trend in enterprise IT spending, which will enable Broadcom to gain access to VMware's cloud customers and their data centers.

Tan is well-known in the industry for his interest in "mergers and acquisitions." He is adept at leveraged buyouts and capital operations. He previously led Broadcom's $18.9 billion acquisition of the American software company CA Technologies and the $10.7 billion acquisition of the enterprise security business of Symantec, a security software vendor.

According to the announcement of China's regulator, Broadcom started to apply for approval from the Chinese government for this transaction on September 6, 2022. The case was preliminarily reviewed by the State Administration for Market Regulation on April 25, 2023, and on August 22, the regulator decided to extend the further review period. Currently, the case is in the stage of extended further review, with the deadline set for December 13.

The State Administration for Market Regulation stated that during the review process, opinions from relevant government departments, industry associations, peers, and downstream customers were solicited. An independent third-party consulting firm was hired to conduct an economic analysis of the case, and communication and cooperation with other jurisdictions were carried out to understand relevant market definition, market structure, industry characteristics, and the impact of concentration on all aspects. Multiple rounds of discussions were held with the applicant on how to reduce the adverse effects of this concentration on competition.

The announcement stated that after the two companies merge, there may be tying sales of virtualization software and fiber channel adapters, storage adapters, and Ethernet cards, or a reduction in the interoperability between VMware virtualization software and other non-Broadcom hardware products, as well as between Broadcom's fiber channel adapters and non-VMware virtualization software, leading to exclusion and restriction of competition.

Therefore, the State Administration for Market Regulation proposed six restrictive conditions. The first is that when selling Broadcom's fiber channel adapters, storage adapters, Ethernet cards (hereinafter referred to as relevant hardware products), and VMware's server virtualization software to the Chinese domestic market, tying sales in any form is not allowed. The second is to continue to ensure the interoperability of VMware's server virtualization software with third-party relevant hardware products sold in the Chinese domestic market. The third is that Broadcom's fiber channel adapter certification team will maintain the original practice, continue to develop, certify, and release drivers for Broadcom fiber channel adapters to ensure interoperability with third-party server virtualization software. The fourth is to take protective measures for confidential information of third-party hardware manufacturers, including but not limited to signing confidentiality agreements with third-party hardware manufacturers, specifying the scope of information use, separately storing confidential information, ensuring the separation of relevant personnel, and prohibiting cross-employment, with the remaining two being related to confidential information.

The above restrictive conditions are valid for 10 years from the effective date and will be automatically lifted upon expiration. Broadcom originally expected the transaction to be completed by October 31, 2023, but it was forced to postpone it due to not obtaining approval from China. According to the official website of the State Administration for Market Regulation, the agency suspended the calculation of the review period for this transaction on September 25 and resumed the calculation on November 17. Broadcom submitted an additional commitment plan for restrictive conditions to the State Administration for Market Regulation on November 20 and ultimately obtained approval.

As of the close of the US stock market on November 21st, Broadcom's stock price fell by 1.46% to $981.20 per share; VMware's stock price also fell by 4.96% to close at $142.48 per share. Over the past 12 months, VMware's stock price has risen by around 20.35%, with a latest market value of $61.521 billion.

（This article was first published on TMTPost App. Author | Lin Zhijia）