Broadcom's VMware acquisition sparks customer concern

Raghu Raghuram (CEO - VMware)

Chip powerhouse Broadcom recently announced its intention to acquire virtualization pioneer VMware for $61 billion. In light of Broadcom’s less than stellar track record with prior acquisitions (CA Technologies in 2018, and Symantec in 2019), VMware’s enterprise customers are understandably worried.

“Following the purchases of CA and Symantec, Broadcom raised prices, decreased support, and stopped investing in innovation,” says Tracy Woo, senior analyst for Forrester. “VMware customers would be wise to have an exit plan,” she cautioned.

IDC analyst Stephen Elliot sees it differently. Rather than advising VMware customers to identify the exits, Elliot believes customers should “double down” on their relationship with the vendor, moving towards a more strategic business partnership.

Either way, the deal isn’t expected to officially close until the end of 2023, so enterprises can take a wait-and-see approach before making any decisions.

Broadcom tries to reassure VMware customers and employees

Both Broadcom and VMware executives are aware of the concerns and have been saying all the right things, promising that it will be different this time. 

“We are approaching the post-closing planning phase of the transaction process with an open mind, while drawing from the lessons learned from our previous acquisitions of CA and Symantec Enterprise,” said Broadcom in a blog post.

And in a recent town hall meeting, VMware President Sumit Dhawan tried to dispel the worries of VMware’s 35,000+ employees. “Let’s not assume. . . that just because they have done what they have done with Symantec and CA is something that they intend to do with VMware because we’ve heard quite the opposite so far,” Dhawan said.

Broadcom insists that it values VMware’s technologies as well as VMware’s strong relationships with enterprise customers, hyperscalers, systems integrators and channel partners. “We don’t want to change any of that, and in fact, we want to embrace those relationships,” says Broadcom.

The company promises that the deal will ultimately be a boon to customers, giving them “greater choice and flexibility to build, run, manage, connect and protect traditional and modern applications at scale across diversified, distributed environments.”

Will Broadcom stifle VMware innovation?

One potential red flag is Broadcom’s stated goal of increasing VMware’s annual profits from $4.7 billion to $8.5 billion within three years. Broadcom contends that it can do this by “eliminating duplicative general and administration functions across human resources, finance, legal, facilities and information technology.”

Forrester’s Woo is skeptical. 

“Eliminating duplicative back-office functions doesn’t add up to the nearly $4 billion in additional profits Broadcom seeks. What else will they need to cut?” The worry is that Broadcom will take the scalpel to other areas, such as customer support and R&D.

If Broadcom’s vision of a full-stack, mainframe-to-edge computing powerhouse is to become a reality, the company will need to invest not just in high-value projects, as Broadcom has indicated it will focus on, but also VMware initiatives that are just gaining steam, such as its container management software, Tanzu.

Perhaps, the extensive product portfolio, existing enterprise dependencies, and combined sales channels will enable the new VMware to achieve that rapid growth spurt without cuts to personnel, support, or innovation, but nearly doubling profits in three years is an aggressive goal.

Plus, there is Broadcom’s track record of hiking prices, trimming operating budgets, and cutting support after acquisitions, a track record which, according to a survey by 451 Research, already worries VMware’s existing customers.

The survey of more than 300 technology leaders, which was conducted after the acquisition was announced, found that while many tech leaders believe there could indeed be synergies between the two companies, 40 per cent of respondents had negative feelings about the proposed deal.

The top concern from respondents was the same one analysts have been voicing: that Broadcom would stifle innovation.

Will Broadcom treat VMware differently that its other acquisitions?

However, several factors point to a future that doesn’t necessarily follow Broadcom’s track record with previous acquisitions. The first is scale. 

With a purchase price of $61 billion, VMware is by far Broadcom’s biggest acquisition to date, which puts intense pressure on Broadcom to make it a growing, sustainable operation, rather than milking it dry, as Broadcom has been accused of doing with its prior purchases.

The next factor is the existence of VMware’s strong partner ecosystem. Broadcom needs to build relationships with channel partners, or a big part of VMware’s value could evaporate quickly.

The timing of the deal also comes into play. VMware had been pivoting from being a server virtualisation vendor into containers, multi-cloud offerings, and hyperscaler products, so a roadmap that integrates Broadcom’s existing assets in networking, security and AIOps with VMware’s portfolio builds on a transition already in the making.

Finally, a major difference with this acquisition is that VMware products don’t compete with Broadcom’s. “There is not a lot of overlap in these two companies’ portfolios,” says Elliot. “For Broadcom, everything that VMware brings to the table is additive.”

VMware technologies are already deeply entrenched in most enterprises, and the company’s customer relations tend to be well regarded. “VMware is very sticky,” Elliot adds. “Broadcom understands that, and they want to maintain or even expand on that stickiness.”

Elliot argues that VMware’s unique position as a virtualisation pioneer with a massive, loyal customer base makes this deal very different than previous Broadcom acquisitions, which had more overlap and were in more commodified market sectors.

“You do a deal like this to transform your business, to drive growth, to create a better relationship with customers,” Elliot said. “Broadcom’s attitude is that they have a lot to learn from VMware. VMware has operating practices that are exceptional and could influence the future of Broadcom.”

Will a brain drain dampen the deal?

At a VMware town hall shortly after the deal was announced, one of the first questions VMware’s Chief People Officer Betsy Sutter fielded was from an employee who asked, “Why should I stay?” The implication is that if Broadcom strips VMware down for parts, world-class engineers, support specialists, and sales and marketing experts will leave.

Sutter disputed the premise, pointing out that the acquisition could open up opportunities for both employees and customers.

Yet, several of VMware’s top execs have already left the company, recruiters from competing tech vendors have been circling, and there are plenty of rumours about an impending employee exodus at VMware.

“The acquisition is supposed to close by the end of 2023, so this is by no means a done deal. Internal turmoil at VMware could pose problems,” Woo notes.

Synergies could open up new business models

One indication that Broadcom is serious about investing in VMware is that the chip maker has announced that the Broadcom Software Group will be rebranded as VMware after the deal closes.

“If Broadcom and VMware can combine strengths, not only will the integration of the portfolio benefit customers, but the synergies among these various products could unlock new business models,” Elliot said.

Broadcom has a vision of transforming itself into a software powerhouse that enterprise customers can rely on from mainframes to networking to security to virtualisation to edge computing.

VMware itself had been pursuing multi-cloud and container initiatives, such as Project Arctic and Tanzu Kubernetes, that align with the vision Broadcom has for the future of its enterprise software group. 

The idea is that Broadcom’s existing software suite, which includes AIOps, cyber security, and enterprise automation solutions, will be tightly integrated with VMware solutions for cloud infrastructure and modern applications.

“Because these two portfolios are so large and important to enterprise production environments, the acquisition creates an opportunity (for Broadcom/VMware) to build stronger customer relationships,” Elliot said. “There’s value in the breadth of portfolio, especially if they can stitch these different products together into a coherent whole.”

What should VMware customers do?

For many enterprise customers, their cloud and application infrastructures rely heavily on VMware products, so decoupling would not be easy. However, it’s probably not a bad idea to at least sketch out a potential exit strategy in the event that the worst fears of Broadcom skeptics come to pass.

For most, however, taking a wait-and-see attitude is probably the prudent approach. The deal isn’t slated to close until Q4 2023, which buys enterprises time to assess their options.

Elliot recommends that VMware customers should focus on product planning, future road maps, and better communications to create a more strategic business partnership.

That approach is probably applicable only to very large enterprises. After the previous CA and Symantec acquisitions, Broadcom left smaller accounts out in the cold.

Even so, not only will Broadcom Software Group rebrand as VMware, but the chip maker is paying a premium for VMware. When the deal was announced, the $61 billion price tag represented a 44 per cent premium over the closing price of VMware common stock.

It would be an odd move for Broadcom to pay a premium for an asset it intends to strip down for parts.

Whichever path Broadcom chooses for VMware—milk it for short-term profit or invest in VMware like it’s the new crown jewels—existing customers would be wise to keep their options open.

In the short term, it’s probably a smart bet to take Elliot’s advice and see if you’re able to create the strategic relationship that you want with VMware, but if that doesn’t work out, you’ll have bought yourself the time to develop a thorough exit plan.

Jeff Vance is an IDG contributing writer and the founder of Startup50.com, a site that discovers, analyses, and ranks tech start-ups. Follow him on Twitter, @JWVance, or connect with him on LinkedIn.