On May 27, Beijing time, chip manufacturer Broadcom announced on Thursday that it would spend US $61billion (about RMB 400billion) to acquire virtualization software giant VMware** In fact, as early as before the announcement of the transaction, Broadcom had been secretly watching the company from afar.
Chenfuyang, CEO of Broadcom
Enough patience
People familiar with the matter said that VMware has been one of the most important targets on Broadcom's acquisition list for some time. However, before further advancing the acquisition transaction, Broadcom quietly reviewed the company. Broadcom spent about a year analyzing data, studying VMware products, and trying various solutions before engaging with VMware.
In this way, the acquisition of the largest chip manufacturer in history and one of the largest technology transactions in history began. The acquisition agreement announced on Thursday brought together a large semiconductor company and a silicon valley software pioneer. Before the foreign media broke the news of the negotiation earlier this week, few people expected the merger. Broadcom plans to make VMware the key to its software strategy and reduce its dependence on the chip industry, which is sometimes prosperous and sometimes depressed.
This "marriage" started slowly for a reason. VMware was part of Dell technologies until it was spun off last year. This split was announced in April 2021 and completed on November 1. Leaving Dell makes VMware a more attractive acquisition target. But people familiar with the matter said that at least six months after the transaction was completed, Broadcom executives began to take action or show their interest.
According to the tax law, the divested company cannot carry out merger and acquisition negotiations for a period of time. Lawyers usually suggest six months, so Broadcom has to wait until it feels that VMware is willing to participate in the negotiation.
Dell also wants to sell VMware shares
Negotiations between the two sides began in early May. At that time, hock Tan, CEO of Broadcom, gave a letter to Michael dell. After VMware was spun off from Dell, Dell remained the largest shareholder of VMware. Chenfuyang, a Malaysian born entrepreneur, has built Broadcom into one of the largest and most diversified chip manufacturers. He wants to test whether Dell is interested in a business cooperation.
The two arranged a meeting in Austin, Texas. There, chenfuyang officially introduced his acquisition plan to Dell: he promised to provide a generous premium and create value far higher than that price. Dell seems to accept this idea, partly because his 40% VMware stock has been underperforming since the split. Dell is chairman of VMware's board of directors, which has set up a trading committee to analyze possible acquisitions.
If the start-up phase of the transaction is relatively slow, both parties will soon make up for the lost time. Once the two sides agreed to continue the transaction, the transaction was concluded within two to three weeks.
In addition to chenfuyang and Dell, the chief negotiators of this transaction include Tom Krause, head of Broadcom software department, and Egon Durban, partner of private equity giant Silver Lake capital. Silver Lake capital is the main shareholder of VMware and helped Dell complete the privatization of its namesake company nearly 10 years ago. Bankers from Goldman Sachs and JPMorgan Chase advised VMware.
Broadcom is no stranger to mergers and acquisitions. The company is the product of the merger with chenfuyang's Anhua high tech company in 2016. Since then, it has completed several blockbuster deals. Broadcom has accelerated the M & a process.
"We are proud to have a very clear vision of what we want to do," Klaus said. "When we see these opportunities, we will act quickly."
As a result, Broadcom hired consultants, and the employees were busy completing due diligence to match VMware (code named Verona during the negotiation) with Broadcom (code named Barcelona).
US $32billion debt financing
The code name of the European city is very appropriate, because in the final stage of the negotiations, Dell participated in the world economic forum in Davos, Switzerland. At the same time, Broadcom cooperated with at least four banks and introduced two more banks a few days before the transaction was concluded.
The two banks are Barclays, Bank of America, Citigroup, Credit Suisse, Morgan Stanley and Wells Fargo. They finally agreed to provide us $32billion loan to Broadcom, the largest debt financing in more than a year.
Although the stock market turmoil this month hit the technology stocks, the transaction between the two sides proceeded smoothly and regular due diligence was conducted. According to people familiar with the matter, this is more like a traditional negotiation than the last large technology transaction in which Elon Musk bought twitter for $44billion.
Inquiry terms and breakup fee
People familiar with the matter said that both sides wanted to act quickly to minimize information leakage and deal with the volatile market, so VMware postponed negotiations with other potential bidders. Instead, a so-called "inquiry clause" was added to the agreement.
According to this clause, VMware will be able to seek competitive offers within the next 40 days. This arrangement is rare for strategic transactions of this size. This reassures VMware's board that they can continue to look for good offers.
The two sides agreed to pay a $1.5 billion breakup fee, but VMware only needs to pay $750million if it can find a better offer before the July 5 deadline.
Due to the inquiry clause in the agreement, this transaction is more acceptable to VMware, and Broadcom is willing to accept it.
"That's the way it is," Klaus said. "It's part of a deeply negotiated agreement. We made a lot of choices."
He said that considering the price and other conditions, "it seems to be a correct balance to put the inquiry terms in".