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The battle for control of the cloud’s soul heated up a bit when Broadcom announced plans to pay $61 billion for VMware, a price tag that makes the merger one of the biggest tech deals of all time. The purchase gives the growing conglomerate control of a once-critical layer for software delivery.
Broadcom may be popularly known as a brand that makes chips and hardware like modems, but those years are long gone. The modern version grows into a conglomerate that absorbs companies, often with outdated technology, and finds a way to run them independently and profitably. The new acquisition represents a significant shift from traditional hardware manufacturing to the burgeoning world of software.
VMware is a company known for creating an almost essential software used by developers and development teams to create and run virtual machines. It has long been popular with developers, allowing them to package all files and the operating system for a specific machine into one file that can be easily duplicated. Users can download a copy of the VM file, start it anywhere and be sure there will be no interruptions.
“They own a significant chunk of the on-premises data center virtualization space,” a user by the name of “Luna” said via Hacker News, explaining why VMware is an attractive buy. “A lot of organizations still run their own kit, and VMware makes some damn good tools to get the most out of that investment. There are competitors in this space, but none with the breadth and depth of VMware.”
User Indigodaddy added, “For the most part, VMware works ‘simple’ and is firmly entrenched.”
While the idea of virtualization dates back to the world of mainframe computers, VMware pioneered its use in desktop machines. The same approach is becoming more and more useful in the world of multiple competing clouds. VMware’s technology is a key component in strategies that depend on easily moving software to the cloud, where it can run quickly, securely, and cost-effectively.
Broadcom plans to integrate some of its other software companies into VMware and operate them all under the “VMware” brand name. The company has already assembled a wide range of software companies offering leading options for tasks like AIops and Devops with similar — but much smaller — acquisitions. Some brand names that are now under the Broadcom umbrella are Arcot, Symantec, Clarity and Rally.
The VMware line is largely complementary. The security and operations management tools currently owned by Broadcom address different issues than VMware. However, all of them are purchased and deployed by the same development teams that manage their local stack.
“The combination of our assets and talented team with Broadcom’s existing enterprise software portfolio, all housed under the VMware brand, creates a remarkable enterprise software provider,” said Raghu Raghuram, CEO of VMware. “Together, we will offer our customers even more choice, value, and innovation so they can thrive in this increasingly complex multicloud era.”
The merger also offers both companies the opportunity to diversify. Broadcom is abandoning its focus on chipmaking and hardware manufacturing in favor of higher margin potential with software. VMware gains access to the hardware layer and the longer-term stability of the hardware business.
“[Broadcom CEO Hock Tan] has previously said that the current chip boom will not last and has made it clear that he does not want to be persevered with the lower growth rates that may result if today’s semiconductor party becomes tomorrow’s hangover,” said Tim Culpan, an analyst at Bloomberg.
The attractive – and competitive – software market
The challenge for Broadcom will be to maintain VMware’s installed base in the face of increasing competition, often from open source solutions. Some developers prefer lightweight options like Docker, sometimes referred to as containers. These break the file into smaller, composable pieces, often saving time and bandwidth during shipping and installation.
Some of the big cloud providers have largely opted for Kubernetes, an open-source solution that will quickly juggle containers by scaling collections of them up and down. VMware also offers similar options, but usually with proprietary software that is often easier to use and more automated. Their tools will also provision and juggle virtual machines while maintaining security.
The goal for the new VMware will be to maintain enough quality in the existing software to ensure customers have no incentive to rewrite their applications. At the same time, they can reduce headcount and raise prices to increase profits. The game plan for these mergers often hinges on the new management team clearing deadwood and streamlining the organization to save on salaries and speed development.
“Broadcom has an acquisition approach that doesn’t always make innovators happy, but the strategy has worked so far — particularly for shareholders,” said Daniel Newman, founding partner and principal analyst at Futurum Research. “I hear that a lot, but personally I don’t find it as concerning as some do.”
Integration – or assimilation?
Broadcom might also be able to create some synergies between the different software lines at both companies. The different software packages from previously independent brands such as Symantec, Arcot and VMware can be better integrated so that they perform better and also sell across product lines.
Others see great strategic opportunities for the merger. Some suspect that VMware is slowly becoming the default base layer for the private cloud and slowly expanding into the public cloud. Applications can be bundled into a VM file that runs either locally or on a remote cloud.
“VMware has become the operating system of the private cloud,” said “spaintech” on Hacker News. “From an enterprise perspective, VMware is closer to the hardware than any other operating system.”
Some speculate that the synergy between the two parts will also open the door for the company to go into the data centers and build ARM, RISC or x86-based machines that work well with the VMware layer.
However, these possibilities lie further in the future. The current announcement states that the deal is not expected to close until 2023. In fact, the agreement includes a “go shop” clause that allows VMware to look for other applicants. However, that determination appears to be aimed primarily at finding the best price, as much of the focus is on leveraging the synergies that could result from merging Broadcom’s software portfolio with VMware’s.
“VMware has long been known for its leadership in enterprise software, and through this transaction we will offer the next generation of infrastructure software to customers worldwide,” said Tom Krause, president of Broadcom Software Group. “VMware’s platform and Broadcom’s infrastructure software solutions address different but important business needs, and the combined company will be able to address them [these needs] more effective and safer.”
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