Whirlwind talks led to Broadcom’s $69.1bn capture of VMware

In a complex transaction that featured eight banks and four law firms as advisors, the deal boiled down to just two people, who quickly agreed on one of the world’s largest technology deals of all time.

Broadcom’s Hock Tan and PCmaker’s Michael Dell, architects of more dealmaking deals than many Wall Street veterans, were the key architects of the chipmaker’s $69.1 billion acquisition of VMware.

“Tan reached Michael Dell two weeks ago,” said one person with direct knowledge of the matter. “A lot was done from client to client, the banks were not necessarily involved.”

This account of how a hurricane deal came about is based on several people with knowledge of the talks. They said the two billionaires had moved with remarkable speed to create a diversified tech giant, just as rivals are retreating amid a plummet in the value of tech stocks.

It’s also the biggest bet yet for Malaysian-born Tan, known as the chip industry archconsolidator that transformed Broadcom into a behemoth larger in market value than Oracle, Intel, Cisco and IBM.

After being forced to accept more deals in the semiconductor sector and facing stiff opposition from competitors and regulators, Tan has shifted his focus to software, with VMware becoming his latest target.

Broadcom CEO Hock Tan speaks on the floor of the New York Stock Exchange © Lucas Jackson/Reuters

“Tan is very contrarian,” said Tony Wang, who covers Broadcom as an analyst for T Rowe Price, one of the largest outside shareholders. “He doesn’t care what Wall Street thinks and he’s very opportunistic,” he said

When talks began earlier this month, Dell was hosting Tan at his palatial mansion in Austin, Texas. It was the same situation in which seven years earlier he got Joseph Tucci, EMC’s then-CEO, to sell the technology conglomerate — and owner of VMware — to Dell Technologies for $67 billion.

A few days later, bankers were brought in to help Tan raise the $32 billion he needed to fund the transaction. The deal was codenamed Project Atlas. Advisors referred to VMware as Verona, after the Italian city that was the setting Romeo and Julietand Broadcom as Barcelona, ​​the Catalan capital.

Despite attempts to deceive, news of a possible takeover leaked out. This forced Tan and Dell to close the transaction quicker than they had hoped, prompting them to include a “go shop” clause in case another buyer showed up with a higher offer.

Wednesday’s acquisition provides “shareholders and employees with an opportunity to participate in meaningful upside moves,” said Dell, who will earn $24 billion from the sale while its private equity partner Silver Lake owns a stake in VMware of 6 billion US dollars is involved.

Dell and Silver Lake can get up to $15 billion in cash from Broadcom, but the merger’s 50% equity component, which is designed to protect Broadcom’s investment-grade debt rating, shows their willingness to gamble on Tan.

Tan, an engineer educated at the Massachusetts Institute of Technology, was appointed chief executive of Broadcom’s predecessor, Avago Technologies, in 2006 after it was acquired by private equity groups KKR and Silver Lake for $2.1 billion. Since then, he has increased the company’s value more than 100-fold to a market cap of $225 billion.

Early on, Tan focused on strengthening the operations of what was then a specialized seller of semiconductors for computer mice and cell towers.

KKR and Silver Lake took Avago public in 2009, but it wasn’t until four years later, in 2013, that Tan closed its first notable deal, acquiring CyOptics, a smartphone chipmaker, for $400 million.

“Hock didn’t become an acquirer until he had a very solid understanding of the granular microeconomics of how to run a scaled semiconductor business,” said a person close to the entrepreneur.

Operating from a tax-privileged headquarters in Singapore, Tan got caught by the deal bug. In 2014, he acquired LSI, a data center chip designer, for $6.6 billion.

The deal turned Avago, which was renamed Broadcom but kept its ticker “AVGO,” into a leading supplier of chips embedded in cars, industrial robots, and even miniature computers like the Raspberry Pi.

In 2017, then-US President Donald Trump celebrated Tan as a corporate hero by inviting him to the White House celebrate its decision to bring Broadcom back to American shores and abandon its Singapore headquarters amid a corporate tax cut.

Michael Dell will make $24 billion from the sale © Matthew Busch/Bloomberg

The political dalliance proved humiliating. Weeks after his White House visit, Trump blocked Broadcom’s attempt to buy Qualcomm for $142 billion over national security concerns.

With regulators hostile to Broadcom’s ever-growing share of the semiconductor industry, Tan shifted focus. Its first two software acquisitions, CA Technologies and Symantec, targeted struggling and slow-growing businesses that nevertheless formed the core infrastructure at many of the world’s largest corporations.

After Tan put his deal machine on hold as tech valuations soared in 2020 and 2021, Tan opportunistically jumped into VMware during a surge in tech stocks this year. Even after Thursday’s Broadcom deal announcement, VMware stock was down about 40 percent from its 2019 peak.

VMware software connects enterprise IT infrastructure to public and private clouds. It will keep its name and be the platform from which Broadcom builds a broader software business that sells bundled services to large corporations.

Tan is a saver who abhors the tech industry’s focus on what he calls “brilliant new objects,” the introduction of new products that consume resources from the products that generate a company’s profits. “His strategy is always to double or triple investments in the core of a company,” said a source.

He expects to turn VMware, already a cash cow that helped Michael Dell revitalize his PC empire, into a business nearly twice as profitable.

In the second quarter, Broadcom’s revenue increased 23 percent to $8.1 billion, while free cash flow was $4.2 billion. Analysts expect Broadcom to be able to raise the money to pay off VMware’s acquisition debt in about a year, paving the way for even more deals.

The VMware deal will be a severe test of whether Tan can continue to transform his company and the tech industry. He remains typically optimistic about his chances, telling analysts on Thursday: “We think we’re going to execute a lot, a lot differently and hopefully better than what we’ve seen so far.”

With Mark Vandevelde in New York, Tim Bradshaw in London and Richard Waters in San Francisco

Whirlwind talks led to Broadcom’s $69.1bn capture of VMware Source link Whirlwind talks led to Broadcom’s $69.1bn capture of VMware

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