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 announced on May 26 that it would buy VMware for $61 billion. The offer includes a “shopping provision” that allows 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, but also because of the potential impact on so many businesses and data center operators.
VMware has more than 500,000 customers worldwide who use everything from virtualization technology to tools for deploying and managing virtual machine (VM) and container-based applications in hybrid multicloud environments. Such a massive presence has industry analysts and VMware customers wondering about the implications of the Broadcom acquisition for VMware’s future and for the customers themselves.
“(Broadcom is) paying a steep premium for VMware, which basically means it’s better to do nothing to disrupt the money that VMware is making,” said Ashish Nadkarni, group vice president of IDC Worldwide Infrastructure Practice, in a statement. interview with Data Center Knowledge. “If Broadcom is smart, which I know, it will leave VMware alone and let VMware be VMware.”
Broadcom a “ruthless acquirer”
Broadcom’s reputation precedes it, however. After Broadcom bought CA Technologies in 2018 and Symantec in 2019, customers of both companies “saw massive price gouging, deteriorating support and stalled development,” according to a blog post by Forrester Research.
In describing Broadcom’s acquisition strategy, Broadcom CEO Hock Tan said he is looking for companies that have a strong market position and can be made more profitable without making huge investments, according to a Bloomberg article. In fact, cutting expenses is a key strategy for Broadcom after the acquisition. Financial analyst firm Sanford C. Bernstein noted that Broadcom reduced CA and Symantec’s cost base by 60-70%, according to the article.
“Broadcom is known as a cutthroat acquirer in tech circles, for no other reason than being very focused on cost optimization,” said Vladimir Galabov, head of the cloud and data centers research practice. data from Omdia, in an interview with DCK.
What VMware brings to Broadcom
Historically, Broadcom has focused on semiconductors, particularly in storage and networking, but has diversified into profitable enterprise software companies in recent years.
VMware, which split from Dell in 2021 and is moving from upfront payment for licenses to a subscription and software-as-a-service model, won net income of $1.82 billion and saw its annual revenue grow 9% to $12.85 billion in fiscal 2022. With the addition of VMware, the software business Broadcom’s combined business would account for nearly half – 49% – of Broadcom’s $40 million in annual revenue.
If the deal is successful, VMware will provide Broadcom with a stable revenue stream from its virtualization software business which includes server, storage and network virtualization and Virtual Desktop Infrastructure (VDI) technology.
VMware has tried to capitalize on its installed base of customers to capture more of the multi-cloud and application space. This strategy includes Tanzu Kubernetes software for deploying and managing containerized applications and Project Arctic, the next evolution of its flagship vSphere server virtualization software that will allow IT administrators to manage all resources across multiple public and private clouds at from a single console.
“VMware has a very experienced management team. They really understand the market and they set a lot of things in motion,” Gary Chen, research director of software-defined computing at IDC, told DCK.
Will VMWare executives continue to make their own decisions?
The big question, said Omdia’s Galabov, is whether VMware executives will be allowed to keep all of these things moving, or whether Broadcom will seek to optimize VMware’s costs and maximize profits.
Analysts say VMware should continue to invest in research and development, sales and marketing, and professional services, especially in the high-growth market, to provide businesses with the software to run and manage container-based applications.
VMware was lagging behind in the container software market and needs to continue investing in it to capture a bigger share of a market 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 companies develop and implement a migration strategy to cloud-native, container-based applications, he said. declared. VMware could leverage its existing enterprise customers who have not yet considered containers.
“That might be VMware’s strong point because it works with virtually every business in the world,” Galabov said. “Success will require a consultative approach. It’s expensive to launch a new discipline, and it’s not going to pay off right away.
IDC’s Chen agrees with Galabov, noting that part of VMware’s success is that it invests in research and development to create cutting-edge technology. If Broadcom significantly cuts VMware’s R&D budget, it won’t affect Tanzu immediately, but it could affect future plans, he said.
“VMware has no choice but to go with containers and cloud native, because that’s where the whole industry is heading,” Chen said. “Everyone is looking to modernize, so there must be a huge amount of R&D there. It cannot lose the advantage of innovation and stand still. It needs to keep pace with its competitors and also invest in sales and marketing as it is a new product for VMware.
Analysts say the concern could be much ado about nothing. Broadcom announced that its existing Broadcom software group, which includes CA and Symantec software, will be rebranded and operate under the VMware name. That might suggest VMware executives could continue to run their own show.
VMware has had two previous acquisitions. When first purchased by EMC in 2004 and when Dell acquired EMC in 2016, VMware was left alone and given the freedom to continue innovating its product portfolio. Broadcom could do the same and give VMware the autonomy it needs to operate as usual, IDC’s Nadkarni said.
“It could be a non-event. When VMware was acquired in the past, it ultimately didn’t impact customers,” Chen said. For some customers, that was a bonus because it offered better integration with Dell, he said.
Galabov said it’s possible a VMware acquisition will change Broadcom’s culture and allow VMware to continue operating on its own. But that’s nothing Broadcom has done before, he said.
“Most likely Broadcom made promises that they wouldn’t completely destroy the company. I think VMware’s core business is very secure,” he said. “I’m just not sure that Broadcom is willing to make the investment necessary to make Tanzu the vSphere of the container world.”
Customer impact for industry
It’s too early to know what the impact will be for VMware customers and what Broadcom’s strategy will be. But if Broadcom’s software acquisition history is any guide, VMware customers could face potential price hikes, analysts say.
Following Broadcom’s acquisition of CA, customers have been asked to pay more, and in some cases significantly more, for software licenses, says Naveen Chhabra, principal analyst at Forrester Research, in an interview with DCK. Additionally, the cost of support contracts has increased while support levels have fallen. 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 is running from the same playbook, these are the three concerns existing customers can expect to face.”
This uncertainty opens up opportunities for competitors, Chen says. This includes Nutanix, IBM Red Hat, and major public cloud players like Amazon Web Services, Microsoft Azure, and Google Cloud, who may try to convince VMware customers to migrate from VMware to their cloud.
“You make people think, ‘Maybe I should hedge my bets? What are my options if this ends up not being good for me?’ Competitors will try to exploit this,” Chen says.
