https://www.linkedin.com/pulse/brian-maddens-brutal-unfiltered-thoughts-broadcom-vmware-brian-madden/
Brian Madden’s brutal and unfiltered thoughts on the Broadcom / VMware deal
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Brian Madden
Unfettered by formal education or training
Published May 26, 2022
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Today Broadcom and VMware announced that Broadcom made an unsolicited offer to acquire VMware for $61 billion, which, factoring in VMware’s debt, values the whole transaction closer to $70B. (And that doesn’t include Broadcom’s post-closing costs over the next few years for severance, breaking leases, etc.).
In this post, I’m sharing my opinions and analysis on this deal and why something like it was inevitable, as well as a healthy dose of unsolicited advice for my former colleagues.
Who am I? I spent 28 years in the IT industry, most of those as an industry analyst writing on my own website, BrianMadden.com. (The site is no longer online, backstory here.) I’ve written, edited, and/or published several books including a few about VMware, I wrote thousands of blog posts (hundreds about VMware) and I worked at VMware for 4 years up until 3 months ago. I’ve since changed careers and do not work in IT anymore, so I don’t have a “dog in this fight,” as it were.
At VMware, I worked in the EUC BU (end user computing business unit) in the CTO office as a distinguished technologist, which is a very senior position. (I was a “P8” level which is the equivalent of a principal engineer, though I was not an engineer.) My job was to talk to customers and partners about VMware EUC and our vision, as well as help with internal strategy and planning, vision, roadmaps, how we tell our story, etc. I was our executive sponsor for several large customers and (before the pandemic) flew about 300k miles per year for VMware traveling ~80% of the days.
I left VMware in February 2022 because I was burned out and did not agree with or respect the senior leadership of my BU or the company, and I felt that keeping my job meant I had to lie to customers and partners since I no longer believed what I was communicating about our company and products. I negotiated a severance agreement which would’ve included various clauses about not making public comments, though after I left, VMware reneged on that deal and did not pay me, and I didn’t have the mental energy to sue them, so this is why I’m not prevented from sharing my real opinions here. Also that makes this the most expensive article I’ve ever written.
So what started as a few random brain-dump responses to questions from former colleagues turned into this article. I’m writing it because I believe I can provide a perspective for them on why this deal was made, why it’s going to happen, and why if it doesn’t, a similar deal like this will happen.
In other words, what’s happening to VMware via Broadcom was/is inevitable. VMware as you know it is done.
The Broadcom offer was unsolicited
The first thing to keep in mind was that this offer was unsolicited and did not come from VMware leadership. [UPDATE 5/27: This Bloomberg story provides a great background on how this deal came to be.]
This path and the inevitable outcome is definitely not the “VMware way,” so the company will make sure to reinforce the “This is not our fault!” messaging. Most of my time at VMware was when we were owned by Dell, and for the last year or two of that we sorta counted down the days to when we could be “free,” and once we spun out it was all about how awesome our future was going to be as an independent company, and how we're once again in charge or our own destiny for the first time since 2006. Yay!!!!!!
So that lasted six months.
Broadcom will shred VMware. Many of the products will remain, but the company we know today is toast. The VMware leadership is aware of this. While publicly they toe the party line, you can see it in little ways, like how the announcement on vmware.com is posted. The announcement itself isn’t on VMware paper, and rather than the typical branded corporate rah rah it’s just an unbranded PDF. It screams “WE’RE SORRY, THIS IS NOT OUR FAULT!”
But there’s a go shop! Google might be interested!
This deal includes a “go shop” clause which expires on July 5, meaning another company could come in with a higher offer. Everyone I’m talking to is wishing/praying/hoping/wanting someone like Google will swoop in and buy the company instead.
Zero chance.
(Sorry. I really wish it was true too!)
First, Broadcom is offering $142.50 per share. VMW last closed at $95.61 the day before news of this deal leaked, so that’s a REALLY high premium. (And again that doesn’t include the debt and future expenses.) So who’s going to pay more than 50% of the last known real price for VMware? And even if someone did, why would you think they’d treat VMware any differently than Broadcom? (More on this in a bit, but in order for Broadcom to make this deal work, they will increase VMware’s EBITDA from $3.5B to $8.5B which they can only do by shredding the company. Any “friendly” buyer who promises not to shred the company isn’t going to offer such a premium.)
Second, this go shop provision almost certainly gives Broadcom the right to match it. So if some PE firm comes in and offers $150, Broadcom will just match it and now there’s EVEN MORE pressure to shred even more.
Third, if you’re a large VMW shareholder such as Michael Dell or Silver Lake, and you’ve received a gift of 50% premium on your billions of dollars, why would you even push to rock that boat? A bird in hand versus two in the bush and all…
Layoffs
There will be massive layoffs. Massive. Maybe 25,000. This is not speculation. This is math.
Broadcom said they expect VMware to add $8.5B per year in EBITDA within three years. VMware’s fiscal 2022 EBITDA was $3.5B. In other words, Broadcom’s goal is to extract 5 BILLION EXTRA DOLLARS from VMware, per year, every year, starting in 2025 or so.
How do you think Broadcom is going to more than double VMware's profit? There are only two levers to pull: more revenue or lower expenses.
VMware revenue has been flat for a long time. While on paper it looks like they’ve been adding about $1B per year, in reality they bought that much of that growth through acquisitions. (Nicira, AirWatch, Heptio, Avi, Pivotal, Cloud Health, Carbon Black are the big ones off the top of my head.) VMware had to buy growth since the handwriting was on the wall about the future of their core business. (More on that in a bit.)
When Broadcom writes that they’re going to more than double VMware’s EBITDA, that’s based on what VMware has “on the truck today,” as they say. It’s not factoring in hypothetical additional revenue from other companies Broadcom might buy and roll-in to their VMware software division. Based on how VMware has been operating for the past several years, growing EBITDA from $3.5B to $8.5B in three years would require a hockey stick growth pattern, as well as a corresponding hockey stick increase in revenue. If the fully-staffed "future is rosy" VMware of the past 5 years couldn’t do it, why do you think that exponential revenue growth will suddenly start under PE-like ownership of Broadcom?
Instead, Broadcom will find that extra $5B per year by pulling the “lower expenses” lever. What is VMware’s #1 expense? Employee compensation. (By a lot.) And what’s the #2 expense? Real estate (office leases).
You can read all about Broadcom’s history of acquisitions and how employees at the acquired company fare elsewhere. VMware has almost 40,000 employees. There's no reason to believe Broadcom’s history of cutting ~70% of acquired employees will be any different with VMware. And again, this is just math. Broadcom currently has about double VMware's revenue ($27B vs $13B), but with about half the employees (20k versus 40k). So Broadcom today gets a 4x better return per employee than VMware. In Broadcom land, $13B in revenue should align to about 10,000 employees, not 40,000 (there's your 70% cut). Broadcom is not spending $70B for VMware to go from a $27B 20k employee company to a $40B 60k one.
If you don’t believe Broadcom will really cut that many employees because "this time it's different" or whatever, that means you're taking the position that Broadcom will grow VMware's revenue into the $8.5B EBITDA and you should read this section again.
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The article goes on much longer...
There is more on that link I posted below