Investors continued to snap up shares in Broadcom and VMware Thursday after rumored news of their $61 billion union was official, but some VMware customers may have their doubts.
VMware commands more than 70% of the global market for virtualization infrastructure software with more than 500,000 customers, according to Gartner. VMware has seeded almost every data center, connecting apps across the cloud hemisphere.
For Broadcom, known for semiconductor development, the deal (a 44% premium over VMware’s stock price before rumors) is a sudden and strategic shift. VMware will account for 49% of software sales and retain its brand name.
Some CIOs may be scratching their heads and thinking twice.
"Broadcom isn't a company that should even be on the CIOs map prior to this acquisition. They make chips," said Keith Townsend, CEO and founder of The CTO Advisor.
This is Broadcom’s third, and largest acquisition in three years. Analysts note VMware's technology innovation has stagnated and question whether Broadcom is looking for a cash cow.
Broadcom spent $18.9 billion on IT management software and solutions company CA Technologies in 2019, a company known for its mainframe software. The following year it bought Symantec's enterprise security business for $10.7 billion.
"And what has Broadcom done with these two brands since acquiring them? For lack of a better term, it's basically been rent extraction," Townsend said.
Broadcom said it plans to nest its software arm under the VMware brand, resulting in an expanded portfolio of infrastructure and security software solutions.
"If I were a CIO, I'd be concerned that the partner that I'm looking for to help me figure out cloud native and this transition from my traditional VM-based operating model is no longer going to be focused on that cross-cloud mission," he added.
And while VMware has made investments in Kubernetes, its core product remains virtual machines.
Analysts say the VMware buy embodies Broadcom's past enterprise technology deals — buy legacy brands and reap the dividends without large investment in innovation.
The news of VMware's new parent company comes mere months after Dell Technologies completed its spinoff. VMware paid an $11.5 billion special cash dividend to its shareholders, about $9.3 billion of which went to Dell, which controlled more than 80% of VMware.
The spinoff helped pay for debt Dell took on when it merged with EMC in 2016, which created Dell Technologies. To date, Dell Technologies has a $33 billion market value.
Tech stagnation
One possibility for VMware's future is to operate how it has in the past: independent and far from the mothership.
VMware remained a key, largely solo technology provider under the EMC umbrella.
The company built and nourished a standalone identity because of its commitment to hardware agnosticism and working across ecosystems, said John Annand, principal research director at Info-Tech Research Group..
Popular though it is, VMware's core product is in autopilot, with low investment and high margins, said Naveen Chhabra, senior analyst at Forrester, via email.
In fact, the bulk of the enterprise infrastructure space is on autopilot.
Greg Ferro, Packet Pushers Interactive co-founder and a research analyst, sees enterprise technology going through 10- to 20-year innovation cycles.
Virtual machines became the standard in the mid 2010s when enterprises turned to them for operational reasons — fewer servers, more space in the data center and easier to back up.
Enterprises will keep using the infrastructure technology, but it's a market segment that doesn't require much innovation. The technology curve will move as more companies leave data centers.
That gives rise to what Ferro thinks is the key part of the deal, the same sentiment shared by Townsend: "rent extraction."
Broadcom could cut research and development — saving the more than $3 billion VMware spends annually — and reduce the sales force and operations costs, but continue to capture earnings from VMware's loyal customer base.
Until the acquisition is complete, long-term strategy questions fall to speculation. Meanwhile, as integration plans take place, threat actors are dogging core products and evading patches.
Correction: This article has been updated to include John Annand's full name and title.
