According to Bloomberg there may be a Broadcom VMware deal within the week. If Broadcom buys VMware for stock and cash, it will be one of the biggest tech takeovers ever as VMware has a market cap of $52.29 billion as of the end of trading on May 23, 2022. Only Microsoft’s buyout of Activision Blizzard for $68.7 billion and Dell’s acquisition and merger with EMC for $67 billion were larger. Many are puzzled the largest fabless chip maker wants to take over a company that provides cloud, app optimization, and networking services. What are the synergies of a chip maker and a maker of specialized software?
VMware Takeover for $40 Over Current Market Price
According to The Wall Street Journal a bid of $140 a share can be anticipated for a stock that closed on May 23, 2022 at $119.23, was trading at $120 at the start of the year and had gone up to $135 in February and had fallen with the market to $93 on May 18 before news of the possible takeover leaked out. According to a Bloomberg analyst the $160 prices assumes a P/E ratio of 17 which they say is in line with recent deals in the software niche.
Is This Xerox Getting Into Insurance All Over Again?
In 1982 the copier giant Xerox paid $1.6 billion in cash and stock for the property and casualty insurer Crum and Foster. It was one of several moves into the financial sector at a time when Japanese competitors were starting to sell copiers in the USA for less than it cost Xerox to produce them. Eleven years later Xerox finished divesting itself of in insurance and financial businesses. They took a $1.4 billion charge on their books due to insurance losses due to Hurricane Hugo along the Gulf Coast. Back in the 1980s it was fashionable in business schools to say that essentially one did not have to know and understand a business in order to own and manage it. If you could manage one business you could manage any business. Xerox was flush with cash and got into businesses totally divorced from the copied business which they had created. This bit of history may have nothing to do with the potential VMware takeover by Broadcom but one still wonders what the point is following on the heels of Broadcom’s purchase of CA Technologies and Symantec’s security business in 2018 and 2019 respectively.
Is the Point to Diversify Away from Just Reliance of Chips for Income
Broadcom is a big company with a profitable business plan. They do not make the silicon wafers for their chips but rather purchase from foundries in Asia. Thus, they are a “fabless” chip maker. The purchases that they have made seem meant to diversify the company away from an income stream that relies just on computer chips. Remembering the Xerox experience of trying to manage businesses where they had no expertise one hopes that Broadcom keeps VMware intact and does not meddle with decision making. TechCrunch wrote about this and guessed that Broadcom expects to get more liquidity out of the deal. TechCrunch says that the deal appears to be a poor match simply because that is the truth of the matter.
What Does The Market Think of the Deal?
Since news broke of a potential deal VMware has gone up by more than twenty percent and Broadcom is down thirteen percent. If VMware were a legacy company with valuable patents and licensing deals the deal might make more sense. The point may simply be to own business that does not follow the same cycle as the chip industry. In this situation and the market today in general, don’t find yourself trading alone. Sign up for one of the Top Gun Options squadrons where we potentially print money no matter which way the market is going.