History: Decrypting Broadcom's $61 billion acquisition of VMware

The chip maker Broadcom announced on Thursday to spend 61 billion US dollars (about 400 billion yuan) acquisition of virtualization software giant VMware . In fact, before the deal was announced, Broadcom had been secretly watching the company from afar.

VMware has been one of the most important targets on Broadcom's acquisition list for some time, people familiar with the matter said. But Broadcom quietly scrutinized the company before moving forward with the deal. Broadcom spent about a year analyzing the data, researching VMware's products, and trying various options before approaching VMware. 

And just like that, kicked off the biggest chipmaker acquisition in history and one of the biggest tech deals in history. The deal announced Thursday brings a massive semiconductor company together with a Silicon Valley software pioneer. Few expected the merger before news of the talks broke earlier this week. Broadcom plans to make VMware key to its software strategy, reducing its reliance on a boom-and-bust chip industry.

There's a reason this "marriage" got off to a slow start. VMware was part of Dell Technologies until it was spun off last year. The split was announced in April 2021 and completed on November 1. Leaving Dell makes VMware a more attractive acquisition target . But Broadcom executives didn't move or show interest until at least six months after the deal closed, people familiar with the matter said.

Tax law prohibits spin-off companies from entering into merger talks for a period of time . Lawyers typically recommend six months, so Broadcom had to wait until it felt VMware was willing to participate before negotiating.

Negotiations between the two sides began in early May. At the time, Broadcom CEO Hock Tan called Dell CEO Michael Dell. After VMware was spun off from Dell, Dell remains VMware's largest shareholder . Chen Fuyang, a Malaysian-born entrepreneur who built Broadcom into one of the largest and most diversified chip makers, wanted to test whether Dell was interested in a business partnership.

The two arranged a meeting in Austin, Texas. There, Chen Fuyang formally pitched his acquisition plan to Dell: He promised a hefty premium and created value well above that price. Dell appears to have embraced the idea, in part because his 40% holding of VMware stock has underperformed since the split . Dell serves as chairman on VMware's board, which formed a trade committee to analyze possible acquisitions.

If the start-up phase of the deal was slow, the two sides quickly made up for lost time. Once the parties agreed to move forward with the deal, the deal was struck within two to three weeks. 

In addition to Chen and Dell, lead negotiators on the deal include Tom Krause, the head of Broadcom's software division, and Egon Durban, a partner at private equity giant Silver Lake. Silver Lake is a major shareholder in VMware and helped Dell take its namesake company private nearly 10 years ago. Bankers at Goldman Sachs and JPMorgan advised VMware .

Broadcom is no stranger to mergers and acquisitions, the company being the product of a 2016 merger with Chen Fuyang's Avago Technologies. It has made several blockbuster deals since then . Broadcom has accelerated the M&A process.

"We pride ourselves on having a very clear vision of what we want to do," Krause said. "When we see these opportunities, we act quickly."

So Broadcom hired consultants and employees scrambled to complete due diligence to bring together VMware (code-named Verona during negotiations) and Broadcom (code-named Barcelona).

The European city's code name is well-timed because Dell was in Davos, Switzerland, for the World Economic Forum in the final stages of negotiations. Meanwhile, Broadcom has partnered with at least four banks, bringing in two more just days before the deal.

The two banks are Barclays, Bank of America, Citigroup, Credit Suisse, Morgan Stanley and Wells Fargo. They eventually agreed to provide Broadcom with a $32 billion loan, the largest debt financing in more than a year.

Although this month's stock market turmoil has hit tech stocks, the deal went well with regular due diligence. It's more of a traditional negotiation than Elon Musk's $44 billion takeover of Twitter, the last big tech deal, people familiar with the matter said.

Both sides want to move quickly to minimize information leaks and deal with a volatile market, people familiar with the matter said, so VMware delayed talks with other potential bidders. Instead, a so-called "request for quotation clause" was added to the agreement.

Under the terms, VMware will be able to seek competitive offers within the next 40 days , an arrangement rare for a strategic deal of this size. This reassures VMware's board that they can continue to look for good offers.

The two sides agreed to pay a breakup fee of $1.5 billion , but VMware will only have to pay $750 million if it can find a better offer by the July 5 deadline.

With an inquiry-for-price clause in the agreement, the deal was easier for VMware to accept, and Broadcom was willing to accept it.

"That's the way it is," Krause said. "It's part of a deeply negotiated agreement. We made a lot of trade-offs."

"It seemed like the right balance to put the RFQ clause in," he said, given the price and other conditions.

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