Over the weekend, rumors began flying that chipmaker Broadcom was interested in acquiring VMware, the company best known for commercializing the virtual machine concept that gave birth to cloud computing. Bloomberg first reported the potential deal on Sunday.
VMware will not come cheap. It had a market capitalization in the neighborhood of $40 billion before the potential deal was reported, a figure that rose some 20% today to around $48 billion as investors placed bets that Broadcom would pay a hefty premium for the smaller company. Conversely, Broadcom is down over 2%.
VMware has expanded into cloud-native technologies over the years and has a diversified business, much of which is related to the cloud. Broadcom, on the other hand, isn’t involved in much of that, making it seem like a poor match. Probably because it is.
Broadcom builds semiconductors. With a market cap of over $220 billion, the company has tried to diversify in recent years by acquiring software companies to take advantage of software license revenue as a hedge against the vagaries of the hardware market, just like other hardware-focused companies — hello, Cisco.
It spent over $18 billion in 2018 to buy legacy enterprise software company CA Technologies and another $11 billion a year later for Symantec’s legacy security business. Those are very different animals from VMware, which is still a viable company and not some dinosaur with a portfolio of licensing deals on the books that a company like Broadcom can take advantage of.
So why is the deal in the offing, given the apparent lack of fit from a high-level perspective?
Square pegs, round holes
Patrick Moorhead, founder and principal analyst at Moor Insights & Strategies, said it’s not just our lack of imagination: There really isn’t much connective tissue between the two companies. But one thing that many tech companies do have today is financial liquidity. From that perspective, the potential VMware deal is all about putting Broadcom’s money to work in something other than chips.