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Broadcom, VMware $61bn deal could lead to price hikes

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Broadcom’s US$61 billion acquisition of cloud computing firm VMware could result in increased pricing for VMware customers, an industry analyst says.

The deal is one of the biggest acquisitions of the year and a statement of intent from Broadcom as the chipmaker looks to diversify its business into enterprise software.

Andrew Lerner, VP analyst at Gartner that while both companies will adopt a “business as usual” attitude for their respective customers, a price increase is likely.

“Gartner expects Broadcom to increase pricing for VMware customers and adjust R&D spending, based on Broadcom statements and historical precedent with CA Technologies and Symantec,” he said.

Just a few years ago Broadcom attempted to purchase Qualcomm but withdrew its US$117 billion offer after it was blocked by then President Donald Trump, citing national security concerns.

However, that did not deter Broadcom from pursuing further M&A deals. It took over business software company CA Technologies for $18.9 billion and Symantec Corp’s security division for $10.7 billion.

Thus, a deal for VMware looks more logical for Broadcom given recent developments and its M&A aspirations.

“Broadcom has publicly stated that it runs acquired software businesses differently than they were operating previously, to create financial returns consistent with their own “disciplined” business model and reiterated on their call discussing the acquisition,” Lerner added.

David Bicknell, principal analyst at GlobalData says VMware should “take heed” of those companies’ experiences following their acquisition by Broadcom.

“CA Technologies reportedly saw a 40% reduction in US headcount and employee termination costs were also high at Symantec,” he says.

Bicknell, though, does not believe that today’s geopolitical backdrop would see regulators would scupper the deal.

“After having its fingers burnt by regulators in its failed bid to buy Qualcomm, Broadcom will expect this deal to go through. But it shouldn’t be surprised if regulators take a close interest.”

In order to make the deal a success, he adds that Broadcom must let “profitable VMware be VMware”.

Lerner agrees, noting that the company has “strong financials and loyal installed base and a diverse product portfolio”.

Additionally, he says, the company is working to be more relevant to developers and to cloud computing by means of expanding the VMware Tanzu product family.

“There are certainly some potentially positive aspects,” Lerner says.

“Broadcom’s decision to rebrand the software group under the VMware moniker indicates a potential adjustment to prior software acquisitions.”

“Also, there is potential for co-engineering with Broadcom’s existing portfolio leading to product integration enhancements.”

However, his guidance for VMware customers would still be to proceed cautiously.

He says this includes validating existing inventory to prepare for licensing changes and potentially explore vendor alternatives.

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