The year 2022 seems intent on spurring a series of mega acquisitions from the technology industry. First came Microsoft’s $69bn deal to buy games publishing giant Activision. Then, Twitter agreed to sell to Tesla CEO Elon Musk for $44bn. Now, it’s VMware (NYSE: VMW), an enterprise software giant whose products include virtualization, networking, and security management tools.

Broadcom (NASDAQ: AVGO), a chipmaking giant, has agreed to buy VMware in a cash and stock deal worth $61bn. It’ll also assume $8bn of VMware’s debt as part of the agreement.

• The acquisition structure is unique; VMware shareholders will choose to receive either $142.50 in cash or 0.252 Broadcom shares (worth $138.23 based on Wednesday’s closing price) for each VMware share.

• VMware’s biggest shareholders, entrepreneur Michael Dell and private equity firm Silver Lake, representing majority (50.2%) ownership, have signed support agreements in favor of the deal, clearing the way for it to go through.

Why is a chipmaker spending an enormous sum to buy an enterprise software company?

• Broadcom is trying to diversify away from its core business of designing and selling semiconductors. The diversification began in 2018 when it paid $19bn to acquire CA Technologies, a leading provider of IT management software. A year later, it paid $11bn to buy the enterprise business and brand name of Symantec, a cybersecurity software giant.

• The VMware deal effectively seals Broadcom’s fate as a major enterprise software player. Once it closes, enterprise software will no longer be a minor business line for Broadcom but a vital one.

• In Broadcom’s last fiscal quarter (ended May 1, 2022), its software division brought in $1.9bn in revenue. By contrast, VMware reported $3.1bn in revenue (and a net income of $242mn) in the same period.

Broadcom’s acquisition strategy seems smart; Find companies with deep links into big corporations’ IT setups that would be hard to abandon, then improve margins by reducing the cost of sales and marketing, as the company’s head of software, Tom Krause, described to The Technology Letter.

To reduce sales and marketing costs, Broadcom employs “cross-selling and upselling,” that is, promoting other products within its ecosystem to existing enterprise customers. For example, the company tries to get a Symantec customer to buy CA software for the first time. It’s easier to clinch sales this way than to target new customers, which requires spending more money and time.

Broadcom has also turned its focus towards subscription licensing to bring in a steady stream of revenue from its enterprise software, the type Wall Street loves.

VMware’s History

VMware’s history is an intriguing one. The company has been passed around several times in an atypical way for tech companies of its caliber.

• It began in 1998 when five entrepreneurs founded a software startup named VMware and launched it out of stealth a year later. In 2004, an IT giant named EMC bought VMware for $625mn in cash.

• In 2016, Dell Technologies, the eponymous IT hardware maker founded by entrepreneur Michael Dell, acquired EMC in a $67bn deal largely financed by debt. At that time, it marked the biggest acquisition in the tech industry.

• In 2021, Dell Technologies spun off VMware into a separate publicly-traded company. As part of the spin-off, VMware paid a special cash dividend of $11.5bn, with the largest share ($9.3bn) going to Dell Technologies.

• In 2022, Broadcom has agreed to take VMware off the public markets for $61bn.

The acquisition’s terms include a 40-day “go-shop” period during which VMware can seek a better deal. If it doesn’t, then Broadcom should close the acquisition in its fiscal year 2023, barring regulatory hurdles.

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