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Broadcom Exploring Blockbuster Deal to Buy VMware

Ticker Symbols: AVGO, VMW

VMware, the cloud-computing company that counts technology mogul Michael Dell as its largest shareholder, jumped over 22% in midafternoon trading after the company received takeover interest from the giant chip manufacturing company Broadcom. The large deal between two industry titans would be a unique, one-of-a-kind, amalgamation between a manufacturing-based company and a software sales company. The acquisition would also rank amongst the largest in the technology sector.

While there is no guarantee that the deal will finally go through, VMware’s market capitalization is up roughly $9 billion to $49 billion. Meanwhile, Broadcom shares slipped 2.5% to a market value of $215.7 billion. Analysts, on average, expect Broadcom to earn approximately $15.7 billion in the current fiscal year ending October 31st. The combined companies will have yearly revenue exceeding $45 billion, and annualized free cash flow approaching $20 billion.

This deal comes on the heels of the roughly $69 billion that Microsoft announced for its acquisition of videogame maker Activision Blizzard earlier in the year, and Elon Musk’s $44 billion deal for Twitter that was announced last month. Terms of the Broadcom-VMware deal were not disclosed yet as the parties are still in negotiations.

Broadcom does have a history of making large acquisitions in the technology sector under current C.E.O Hock Tan. The company diversified its revenue from purely chip manufacturing to include software businesses including enterprise security firm Symantec for $10.7 billion in 2019. Meanwhile, VMware itself bought cybersecurity firm Carbon Black in 2019 for $2.1 billion. The merger would allow the two companies to better compete in the security services industry which is experiencing one of the largest growth spurts in the entire sector.

The acquisition of the cloud-based company also makes sense for Broadcom from a financial perspective. VMware’s gross margin for fiscal 2022 of roughly 84% is almost 10 percentage points higher than Broadcom’s expected GM of 75.5%. Additionally, even with the large price movement today, VMware trades at a 12-month forward P/E ratio of 16x.

The average cloud computing company currently trades at a forward P/E of around 26x, revealing the value in Broadcom’s bid. It is possible that the current sell-off in the tech sector could create more consolidation in the industry. We advise clients remain nimble and ready to take part in future deals as they emerge.

This content is provided for general information purposes only and is not to be taken as investment advice nor as a recommendation for any security, investment strategy or investment account.