A $61 billion tech mega-deal

Why is this transaction relevant?

This is the third largest tech deal in history after Microsoft’s pending acquisition of Activision Blizzard for $68.7 billion and Dell’s EMC deal of $67 billion. With this deal, Broadcom will bolster software business and expand its business in cloud by leveraging VMware’s complementary business model. Enterprise software services like Virtualisation is a big part of Broadcom’s  strategy to cement itself as a leader in the tech industry and will play a key role in the driver for the firm’s earnings in the future.

Financial highlights of the deal

By acquiring VMware, Broadcom will increase revenue earned from software sales to approximately 49% of all revenue. Broadcom management believes it can increase EBITDA for VMware from $4.7 billion in FY2022 to a target run rate of $8.5 billion within 3 years after the completion of the transaction.

The US Semiconductor Industry

The US Semiconductor industry has lost 33% in market cap in the last 12 months. But the earnings of the industry are forecast to grow by 14% annually. The investors are pessimistic on the industry indicating that they expect long term growth rates will be lower than it has been historically. The industry is currently trading at a PE ratio of 17.1x which is lower than its 3-year average PE of 27.5x.

Deal Structure

Broadcom is going to acquire VMware for $61 billion in cash and stock. The structure will allow VMware shareholders the choice between receiving $142.50 in cash or 0.250 shares of Broadcom common stock for each VMware share. As part of the deal, Broadcom will assume $8 billion of VMware net debt and secure $32 billion in new financing which is already committed.

What will happen because of the deal?

After the acquisition, Broadcom will rebrand its Broadcom Software Group and it will operate as VMware. After the acquisition, Broadcom shareholders will own 88% of the company and VMware shareholders will own 12% on a fully diluted basis. Broadcom, as an industry leader in semiconductors, is expected to double down its efforts in software and cloud tech post-acquisition. With the new laws passed in the USA regarding the ban of export of semiconductors to China, the export business of semiconductor devices is expected to see a slump in the industry. This macro-trend makes this deal all the more lucrative for Broadcom’s shareholders which will show solid earnings growth in the next 3 years in the enterprise software business, while all its competitors play catch-up.

Read and download the full report here

Authors: Andrea Bergoglio, Samuele Menchini, Giacomo Lupi, Adavait Patil, Yash Kesharwani


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