The European Commission has opened an in-depth investigation to assess whether the proposed acquisition of VMware by Broadcom will restrict competition.
The Commission said it is particularly concerned that the transaction would allow Broadcom to restrict competition in the market for certain hardware components which interoperate with VMware's software.
Broadcom makes Network Interface Cards (‘NICs'), Fibre Channel Host-Bus Adapters (‘FC HBAs') and storage adapters, and recently started expanding into software markets.
VMware is a software provider offering mainly virtualisation software which interoperates with a wide range of hardware, including NICs, FC HBAs and storage adapters. The companies' portfolios are largely complementary.
The deal with Broadcom, announced in May 2022, would see VMware acquired for $61bn in cash and shares, in addition to the buyer taking on $8bn of VMware's net debt.
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That’s a chunky consideration for a mature business that booked a net profit of $1.8bn last year, and the Commission wants to ensure that VWware customers aren’t bilked when the transaction is finalised.
VMware technology underpins the tech plumbing required for corporates to operate their virtual workloads, and to network everything together.
The company has partnerships with over 4,500 active cloud and managed service providers, as well as c.1,100 technology partners who manage VMware installs and servicing.
Annual revenue last year was $12.8bn, though only one quarter of that was recurring subscription revenue.
The Register reported that VMware’s 30,000 customers fear that Broadcom will phase out perpetual licenses in favour of more expensive subscription-based licensing in the coming years.
If it goes through, the Broadcom deal would be another feather in the cap of Michael Dell, the VMware chairman.
Dell/EMC spun out VMware in November 2021, with Michael Dell retaining a 40% stake, which the Broadcom takeover offer values at $24bn.
Dell and EMC have been major employers in Ireland for decades, and so is VMware.
VMware opened its first Irish office in Cork in 2005 and currently employs c.1,000 people in Ireland. That total is set to expand after VMware announced plans over the summer to recruit 205 new ‘technologists’ by 2025, part-funded by taxpayers through IDA Ireland state aid.
Kit Colbert, VMWare’s chief technology officer, commented: “Ireland is an important geography for VMware and our commitment to recruit over 200 people in Dublin to bolster our multi-cloud innovation is testament to the exceptional talent pool Ireland provides.”
Competition concerns
The Commission's preliminary investigation indicates that the Broadcom/VMware transaction may allow Broadcom to restrict competition in the market for the supply of NICs, FC HBAs and storage adapters by degrading interoperability between VMware's server virtualisation software and competitors' hardware to the benefit of its own hardware, and/or foreclosing competitors' hardware by preventing them from using VMware's server virtualisation software or degrading their access to it.
This, in turn, could lead to higher prices, lower quality and less innovation for business customers, and ultimately consumers.
In addition, the Commission will also examine whether Broadcom may hinder the development of SmartNICs by other providers.
In 2020, VMware launched Project Monterey with three SmartNICs sellers (NVIDIA, Intel and AMD Pensando).
“Broadcom may decrease VMware's involvement in Project Monterey to protect its own NICs revenues,” the Commission stated. “This could hamper innovation to the detriment of customers.”
Margrethe Vestager, Commission executive vice-president, commented: “Broadcom, a major supplier of hardware components, is acquiring VMware, a key server virtualisation software provider.
“Our initial investigation has shown that it is essential for hardware components in servers to interoperate with VMware’s software. We are concerned that after the merger, Broadcom could prevent its hardware rivals to interoperate with VMware’s server virtualisation software. This would lead to higher prices, lower quality and less innovation for customers and consumers.”
The proposed transaction was notified to the Commission on 15 November 2022. The Commission now has 90 working days, until 11 May 2023, to take a decision.
Photo: Kit Colbert (left) with minister Michael McGrath and IDA Ireland’s Victoria MacKechnie
