News & Analysis

Why the Broadcom Acquisition Could Make Some VMware Staff Jittery

The company plans to integrate some of its other software businesses with VMware and run them all under the brand name VMWare

First things first! Broadcom is paying $61 billion in cash and stocks to acquire VMWare, making it the third largest tech acquisitions ever. The two others are Dell’s $67 billion EMC deal from 2016 and Microsoft’s pending acquisition of video gaming company Activision Blizzard for $68.7 billion. While Broadcom is known for making chips and semiconductors, VMware specializes in cloud computing and virtualization. 

This mega acquisition is slated to boost Broadcom’s software business that it acquired from Dell when the latter spun it off last year. So, if you are using a virtual machine, the chances are that it is powered by VMware or its competitor Citrix. And if you use Apple or Android smartphones, then Broadcom chips are resting on your palms in the form of Bluetooth or Wi-Fi functions. 

Broadcom envisages integrating some of its other software businesses with VMware and then brand them collectively as VMware. Readers may recall that the company has a broad range of software entities that supply options for tasks such as AIops and Devops. Some of the brands under this umbrella include Arcot, Symantec, Clarity and Rally. 

Now that the optics part of the story is out of the way, let’s take a closer look at what this mega acquisition really means. Hark back to Broadcom President Tom Krause’s speech last November on Investor Day… He said the company would actively pursue 600 customers from the global top-1000 list. 

Why so? Because they’re often in regulated industries and therefore averse to risks, meaning that they are loath to change suppliers. These companies  have high levels of complexity in their IT departments, which means high budgets that ramp up still higher. Which means Broadcom can drastically lower sales and marketing costs by focusing on this small pool and diverting these savings into R&D that can ignore other customers completely. 

Talk about creating customization through operational centralization! 

Without getting into the operational matters, we can safely conclude that by focusing on the 600 strategic accounts Krause’s theory held good even for previous acquisitions. Broadcom’s last two software acquisitions of CA and Symantec were spending 17% of their revenues on R&D before they got acquired, post which it got trimmed to 14% as only 600 accounts mattered.

Which means that Broadcom is happy to let go of customers that aren’t on its radar and that has a direct impact on sales and marketing costs. The two acquisitions spent 29% of their revenues on acquiring new customers as against Broadcom’s 7%. 

Another number that Krause had quoted relates to the enterprise segment where Broadcom aims to sustain the 6000 customers that it has. As for the commercial segment, they want to retain 100,000 customers and allow them to trail over time. 

Now, where does that leave VMWare, which obviously needs to trim some of its fat. Especially since Broadcom expects it to double its earnings to $8.5 billion in three years. However, analysts argue that VMWare may require higher sales spends to launch new products. 

But given Broadcom’s strategy outlook for its software division, the future could be quite scary for the sales and marketing staff, especially over the next two to three quarters. 

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