Broadcom Inc. is acquiring all outstanding shares of VMware Inc. in a cash-and-stock transaction for around $61 billion, based on the closing price of Broadcom (News - Alert) common stock May 25. The transaction, to be completed in Broadcom's fiscal year 2023, is subject to the receipt of regulatory approvals and other customary closing conditions, including approval by VMware shareholders.

To put into perspective the magnitude of this deal, Microsoft (News - Alert) acquired video game publisher Activision for $68.7 billion in January 2022, and Dell acquired EMC for $67 billion in 2016. The deal between Broadcom and VMware will be the third largest tech-to-tech takeover if completed.

VMware has more than 400,000 customers, and analysts estimate that as much as 80% of virtualized workloads run on VMware technology. Broadcom will rebrand and operate as VMware, incorporating Broadcom's existing infrastructure and security software solutions as part of an expanded VMware portfolio. VMware's multi-cloud portfolio today forms a flexible, consistent digital foundation that allows various industries to build, run, manage connect and protect important and complex workloads for the benefit of their customers.

In today's software-driven economy, the deal takes Broadcom in the right direction.

But, Bola Rotibi, research director for CCS Insight’s (News - Alert) Software Development practice, told Diana Goovaerts, of Fierce Telecom (News - Alert), that although the deal would help Broadcom expand its infrastructure and cloud management portfolio, Broadcom should be warned that VMware will not turn it into a software company immediately.

VMware will be able to actively solicit, receive, evaluate and potentially enter negotiations with parties that offer alternative proposals until July 5 because of a go-shop provision within the merger agreement. However, if VMware does select another company’s acquisition offer before July 5, VMware will have to pay Broadcom a $750 million termination fee. If another offer is selected after the July 5 deadline, VMware must pay Broadcom $1.5 billion as a break-up fee.

In the deal, which was unanimously approved by the boards of directors from Broadcom and VMware, Broadcom obtained commitments from a consortium of banks for $32 billion in new, fully committed debt financing. Broadcom will also assume $8 billion of VMware’s net debt.

If completed, current Broadcom shareholders would own about 88% while VMware shareholders owned 12%. VMware shareholders will be able to elect to receive $142.50 in cash or 0.2520 shares of Broadcom common stock for each VMware share. The shareholder election will be subject to proration, resulting in about 50% of VMware's shares being exchanged for cash consideration and 50% being exchanged for Broadcom common stock.

The transaction is also expected to add about $8.5 billion of pro forma EBITDA from the acquisition within three years post-closing. Pro forma for each company's fiscal year 2021, software revenue is expected to account for about 49% of total Broadcom revenue.

Michael Dell (News - Alert) and Silver Lake, which own 40.2% and 10% of VMware shares outstanding, respectively, have shown support for the agreement and will vote in favor of the transaction as long as the VMware Board continues to recommend the proposed transaction with Broadcom.

"Together with Broadcom, VMware will be even better positioned to deliver valuable, innovative solutions to even more of the world's largest enterprises,” said Michael Dell, chairman of the VMware Board. “This is a landmark moment for VMware and provides our shareholders and employees with the opportunity to participate in meaningful upside."

Hock Tan, president and CEO of Broadcom, said he is looking forward to the VMware team joining Broadcom.

"Building upon our proven track record of successful M&A, this transaction combines our leading semiconductor and infrastructure software businesses with an iconic pioneer and innovator in enterprise software as we reimagine what we can deliver to customers as a leading infrastructure technology company,” said Tan.

The combined company will provide enterprise customers an expanded platform of critical infrastructure solutions to accelerate innovation and address the more complex information technology infrastructure needs.

“Combining our assets and talented team with Broadcom's existing enterprise software portfolio, all housed under the VMware brand, creates a remarkable enterprise software player,” said Raghu Raghuram, CEO of VMware. “Collectively, we will deliver even more choice, value and innovation to customers, enabling them to thrive in this increasingly complex multi-cloud era."

The combined solutions will enable customers, including leaders in all industry verticals, greater choice and flexibility to build, run, manage, connect and protect applications at scale across diversified, distributed environments, regardless of where they run: from the data center, to any cloud and to edge-computing.

“VMware's platform and Broadcom's infrastructure software solutions address different but important enterprise needs, and the combined company will be able to serve them more effectively and securely,” said Tom Krause, president of the Broadcom Software Group. “We have deep respect for VMware's customer focus and innovation track record, and look forward to bringing together our two organizations."

Broadcom will deliver compelling benefits for customers and partners with the combined company's shared focus on technology innovation and significant research and development expenditures.