Analysis: Broadcom Plans to Acquire VMware for $61B


Different Scenarios can Play Out for the Networking Industry

While the potential Broadcom / VMWare combination could affect many industries, this blog shares our view on its impact on the networking industry.  As an opening thought, this big deal may experience regulatory challenges, considering regulators prohibited Broadcom from acquiring Qualcomm and NVidia from acquiring ARM.  This deal is not a lock.

If the deal closes, we expect Broadcom will follow its familiar playbook and cut headcount significantly.  If past is prologue, Broadcom will slash sales staff and administrative positions immediately after the deal closes.  Broadcom runs lean, and we would be surprised if it didn’t relocate the remaining VMware employees from lovely locations like Palo Alto to more spartan facilities.  Once the initial synergistic changes are complete, we view three scenarios depending on how Broadcom executes following the acquisition.

  • Well-above average execution:  If Broadcom retains key personnel, invests effectively, and can integrate today’s gap between VMware software and Broadcom ASICs, we would consider the merger well-executed.  In this scenario, one route it could take is to leverage SONiC network software and expand VMWare’s NSX system.  A combined company could go directly after the Data Center and enterprise markets and attempt to cut out system vendors like Arista, Cisco, and Juniper.  We bring this up as slightly unlikely, but it is important to bring it up as there is a chance this would create a massive wave of M&A at the systems and semiconductor level.  The threat of this scenario opens the door to conversations with Intel, Marvell, and NVidia to gain more silicon share across the Cloud and enterprise markets.
  • Standard execution:  In this more likely scenario, Broadcom raises the price and cuts costs aggressively to create a better margin profile business and generate operating leverage.  Broadcom discloses less information than VMware, which will lead to ambiguity in the performance of markets like Security and SD-WAN.  The combined company quickly addresses the fears of competition by committing not to creep into the adjacent systems markets (similar to when it bought Brocade).  We see no real change at the combined company level but some modest erosion as companies sure up their multi-vendor strategy.  Modest M&A will occur here.
  • Below average execution:  Broadcom cuts the R&D budgets, and future projects like Project Monterey don’t make it to market.  Competitors and open-source take hold in several core markets as the not-Broadcom market take off in ways not currently envisioned.

If the Broadcom acquisition of VMWare closes, it would be the most direct and significant acquisition in tech and the data center.  It would ripple on through the $100B+ equipment market, and each supplier will look at the market and play out scenarios.  Given the recent pull-back in company valuations as the market has sold off, we anticipate many pitchbooks will show up. 

Companies will seriously look at M&A.  We find this interesting as the enterprise market for DC equipment is peaking as we speak (ASPs are driving revenue growth on mostly flat units/ports).  The Hyperscaler market is now 2+ generations ahead of enterprise-focused systems, so there is already a complete bifurcation between what enterprise and cloud customers buy and use.  Maybe we get two unique supply chains and very different market shares as a result of this corporate combination.