The semiconductor firm is poised to become a dominant figure in software with the acquisition of VMware in one of the tech sector’s biggest deals ever.

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Broadcom’s move to acquire cloud software company VMware is one of its most ambitious since the company’s failed attempt to snap up rival chipmaker Qualcomm in 2018. The $61 billion deal is one of epic proportions in the technology sector, occupying the top three along with Dell’s $67 billion acquisition of data storage firm EMC in 2015 and Microsoft’s pending purchase of gaming company Activision Blizzard for $68.7 billion.

Broadcom has a history of successful acquisitions; in fact Broadcom itself was acquired in 2015 by Singapore-based chipmaker Avago Technologies, which later adopted its name. CEO Hock Tan has been at the helm since 2006, predating the name change. In pursuing a strategy of growth by acquisition, he has built Broadcom into a $225 billion company and one of the world’s biggest chipmakers.

Software firms have been a primary target of Broadcom’s deal-making in recent years. In 2018 it acquired software firm CA Technologies for $19 billion. A year later it purchased Symantec for $11 billion. Broadcom has not sought to connect its software acquisitions to its semiconductors. Rather, especially with the VMware bid, it is becoming clear that the company wants to focus less on hardware and more on the lucrative business of subscription-based enterprise software.

Broadcom’s aim with CA Technologies and Symantec has been to make the businesses more profitable, mainly by cutting costs. “This private equity-style approach has transformed Broadcom into a tech conglomerate”, according to The Economist. Currently 26% of Broadcom’s revenue comes from software. Should the VMware acquisition go as planned, this would jump to 45%. Thus far software has been a good bet for Broadcom, growing its overall operating margins from 15% in 2016 to 32% today.

VMware is similar to Broadcom’s other big software acquisitions in that it makes infrastructure software and has a strong market position. Gartner estimates that VMware has a 72% market share in its specialty, server virtualisation. Further, as Stacy Rasgon of Bernstein notes, its services are “sticky”, meaning that customers rely on VMware’s software to run their server infrastructure and cannot easily switch to another provider.

Broadcom has come under criticism for prioritizing profit margins at the expense of innovation. Some warn that in the hands of Broadcom, VMware will miss the opportunity to reach its goal to grow its subscription and cloud arms from 25% of sales to about 40% by 2025. Analyst Patrick Moorhead says that VMware “has a shot at being the layer on which most companies use the cloud”. At a time when cloud computing is booming, cutting investment and marketing could stymie this ambition.

Aware of its notoriety for layoffs and other painful cost cuts at CA Technologies and Symantec, Broadcom has tried to allay concerns. Tom Krause, President of Broadcom Software Group wrote in a June 22 blog post, “A key pillar of the combined company’s innovation roadmap will be to retain and support VMware’s engineering and R&D talent.” The company plans to rebrand Broadcom Software Group as VMware.

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