A number of analysts believe Broadcom’s planned purchase of VMware for $61 billion makes good sense for investors, but not necessarily for VMware’s virtualization enterprise customers.
Their thinking is that Broadcom CEO Hock Tan’s previous pattern of buying up software companies like CA Technologies and Symantec will repeat itself with the VMware purchase, with a heavy-handed focus on producing profits favored by investors that could include cutting operating expenses and research dollars and raising prices on customers. Nothing wrong with that approach, according to dictates of basic market realities, but some analysts are nonetheless raising various questions.
Four analysts at Omdia on Friday posed the central question this way: “Will Broadcom milk VMware dry or become a full stack company?”
Their answer, following a full analysis, was biased toward assuming VMware will indeed be milked dry, with Broadcom likely to treat VMware as a “cash cow,” as Omdia put it.
“It looks like Broadcom’s goal is to (1) acquire companies with established technology and client base which are less exciting to investors and are cheaper, (2) optimize cost, (3) milk them dry over the next 10-15 years,” the Omdia analysts from the cloud and data center research practice said. The four analysts are Vladimir Galabov, Michael Azoff, Roy Illsley and Manoj Sukumaran.
They noted that VMware is undergoing a transition to its revenue streams, which have slowed revenue growth from double to single digits annually.
To grow VMware would require Broadcom to invest in growing its container software business VMware obtained from the Pivotal acquisition and has made into Tanzu, Omdia analysts said.
“The question is how will Broadcom treat VMware’s container business? It is not key to VMware being a cash cow and will require an investment push to seriously compete with Red Hat,” the Omdia team said. “Given how focused on costs Broadcom’s leadership team is, it makes us concerned that VMware’s container software business would not get the investment needed to grow, or worse, get the chop.”
Broadcom could see value in VMware even without a long-term investment in its container business because customers might still be beholden to VMware’s existing software. “Software can have incredible longevity because of application interdependencies and the uplift to rearchitect an entire environment,” Omdia said. “The world might be going cloud native, but most applications still run on legacy virtual machines.”
However, Broadcom CEO Tan publicly expressed a different intent in making the VMware acquisition. He told investors on a conference call that buying VMware was an opportunity to take Broadcom “to the next level…By adding VMware we will bring significant scale to Broadcom’s software business and reinforce our position as a premier provider of mission critical platform solutions to enterprises globally.”
Analyst Patrick Moorhead of Moor Insights & Strategy was concerned about the VMware purchase when it first aired and reinforced the position that the acquisition will likely be good for investors although not necessarily for customers. “Broadcom has a reputation for acquiring a company, increasing prices, lowering research investment and OPEX spending to 1% of revenue [and] causing consternation amongst its customers,” he told Fierce Telecom.
CCS Insight analyst Bola Rotibi told Fierce Telecom that the deal has “significant integration risk and Broadcom must prove that it can integrate a silicon, software and services story.”
On LinkedIn, analyst Jack Gold of J. Gold Associates put it this way: “The fundamental question is, how does Broadcom buying VMware help VMware grow and expand in market share? Both previous acquisitions by Broadcom of CA and Symantec have not exactly set the world on fire…Or is this a Broadcom strategy to just milk the profits?”
It’s fairly clear the metaphors “milk them dry” and “milk profits” are popular when applied to Broadcom and its plan to buy VMware for $61 billion in cash and stock.