Broadcom Inc., a global technology leader that designs, develops, and supplies semiconductor and infrastructure software solutions, and VMware, Inc., a leading innovator in enterprise software, announced an agreement under which Broadcom will acquire all of VMware's outstanding shares in a cash-and-stock transaction valued at approximately $61 billion, based on Broadcom common stock closing price on May 25, 2022. Broadcom would also take up $8 billion of VMware's net debt.
VMware, a leading provider of multi-cloud services for all apps, pioneered virtualisation technology, an innovation that positively transformed x86 server-based computing. VMware then created the software-defined data centre and played a leading role in virtualising networking and storage, before evolving to become a hybrid cloud and digital workspace leader. Today, VMware's multi-cloud portfolio, which includes application modernisation, cloud management, cloud infrastructure, networking, security, and anywhere workspaces, provides a flexible, consistent digital foundation on which the world's most important and complex workloads are built, managed, connected, and protected for the benefit of their customers.
Following the closing of the transaction, the Broadcom Software Group will rebrand and operate as VMware, incorporating Broadcom's existing infrastructure and security software solutions as part of an expanded VMware portfolio.
The combined company will provide enterprise customers with an expanded platform of critical infrastructure solutions to accelerate innovation and address the most complex information technology infrastructure needs by combining the complementary Broadcom Software portfolio with the leading VMware platform. Customers will have more choice and flexibility to design, run, manage, connect, and protect applications at scale across diversified, dispersed settings, regardless of where they run: from the data centre to any cloud, and to edge computing, thanks to the unified solutions. Broadcom will deliver compelling benefits for consumers and partners thanks to the combined company's shared commitment on technology innovation and strong R&D spending.
Hock Tan, President and Chief Executive Officer of Broadcom, said, "Building upon our proven track record of successful M&A, this transaction combines our leading semiconductor and infrastructure software businesses with an iconic pioneer and innovator in enterprise software as we reimagine what we can deliver to customers as a leading infrastructure technology company. We look forward to VMware's talented team joining Broadcom, further cultivating a shared culture of innovation and driving even greater value for our combined stakeholders, including both sets of shareholders."
Raghu Raghuram, Chief Executive Officer of VMware, said, "VMware has been reshaping the IT landscape for the past 24 years, helping our customers become digital businesses. We stand for innovation and unwavering support of our customers and their most important business operations and now we are extending our commitment to exceptional service and innovation by becoming the new software platform for Broadcom. Combining our assets and talented team with Broadcom's existing enterprise software portfolio, all housed under the VMware brand, creates a remarkable enterprise software player. Collectively, we will deliver even more choice, value and innovation to customers, enabling them to thrive in this increasingly complex multi-cloud era."
Tom Krause, President of the Broadcom Software Group, said, "VMware has long been recognised for its enterprise software leadership, and through this transaction we will provide customers worldwide with the next generation of infrastructure software. VMware's platform and Broadcom's infrastructure software solutions address different but important enterprise needs, and the combined company will be able to serve them more effectively and securely. We have deep respect for VMware's customer focus and innovation track record, and look forward to bringing together our two organisations."
Michael Dell, Chairman of the VMware Board, said, "Together with Broadcom, VMware will be even better positioned to deliver valuable, innovative solutions to even more of the world's largest enterprises. This is a landmark moment for VMware and provides our shareholders and employees with the opportunity to participate in meaningful upside."
The transaction is expected to add approximately $8.5 billion of pro forma EBITDA from the acquisition within three years post-closing. Pro forma for each company's fiscal year 2021, software revenue is expected to account for approximately 49% of total Broadcom revenue.
Transaction Details and Path to Completion
Under the terms of the agreement, which the boards have unanimously approved of directors of both companies, VMware shareholders will elect to receive either $142.50 in cash or 0.2520 shares of Broadcom common stock for each VMware share. The shareholder election will be subject to proration, resulting in approximately 50% of VMware's shares being exchanged for cash consideration and 50% being exchanged for Broadcom common stock. The total $138.23 per-share consideration, based on the closing price of Broadcom common stock on May 25, 2022, represents a 44% premium to VMware common stock's closing price on May 20, 2022, the last trading day prior to media speculation about a potential transaction, and a 32% premium to VMware's unaffected 30-day volume-weighted average price (VWAP). On a fully diluted basis, existing Broadcom shareholders will own about 88% and current VMware shareholders will control approximately 12% of the combined business once the transaction closes, based on the outstanding shares of each company as of the date hereof.
Michael Dell and Silver Lake, which own 40.2% and 10% of VMware shares outstanding, respectively, have signed support agreements to vote in favor of the transaction, so long as the VMware Board continues to recommend the proposed transaction with Broadcom.
Broadcom acquired commitments for $32 billion in additional, fully committed debt financing from a syndicate of banks as part of the transaction.
Broadcom aims to maintain its present dividend policy of paying out 50% of free cash flow from the previous fiscal year to shareholders. Given its robust cash flow generation and plan to swiftly de-lever, Broadcom expects to keep its investment-grade rating.
The deal, which is expected to close in Broadcom's fiscal year 2023, is subject to regulatory approvals as well as other normal closing conditions, including VMware shareholders' approval.
The merger agreement provides for a "go-shop" provision under which VMware and its Board of Directors may actively solicit, receive, evaluate and potentially enter negotiations with parties that offer alternative proposals during a 40-day period following the execution date of the definitive agreement, expiring at 11:59 p.m. Pacific Time on July 5, 2022. There can be no assurance this process will result in a superior proposal. VMware does not intend to disclose developments about this process unless and until its Board of Directors has made a decision with respect to any potential superior proposal.
Broadcom Second Quarter 2022 Results and Third Quarter Fiscal Year 2022 Business Outlook
In a separate press release issued today, Broadcom reported results for its second quarter of fiscal year 2022, which ended May 1, 2022, and provided guidance for the third quarter of its fiscal year 2022.
The Broadcom Board of Directors recently approved a new share repurchase programme that will allow the company to buy back up to $10 billion in common stock until December 31, 2023. This additional share purchasing authorisation is in addition to the December 2021 share repurchase authorisation, which allows Broadcom to repurchase the remaining $3 billion in common stock through December 31, 2022.
Repurchases under the new share repurchase authorisation may be made through a variety of methods, including open market or privately negotiated purchases. The timing and amount of shares repurchased will depend on the stock price, business and market conditions, corporate and regulatory requirements, alternative investment opportunities, acquisition opportunities and other factors. Broadcom is not obligated to repurchase any specific amount of shares of common stock, and the share repurchase program may be suspended or terminated at any time.