The Broadcom acquisition of VMware was one of the major M&A events of 2023, and anyone who’s read my blogs knows that I think there is an enormous strategic symbiosis in play there. The question has always been whether Broadcom sees that too, and if they do whether they actually care enough to take the shot. A second question is whether Broadcom will mess up the VMware story and actually hurt its growth. Let’s try to answer both of them.
Since the deal closed, I’ve gotten a lot of comment from Broadcom and VMware employees. Generally, the former group is more favorable to the deal than the latter, which is no surprise, and I’ve heard from some VMware people who have been laid off. None of this is totally definitive as yet, but here’s a summary of what I’ve heard and how I interpret it.
First, the “official” story from Broadcom as presented to Wall Street focuses as I expected it would, on performance in 2024, meaning tactical rather than strategic. The priority is to cut costs, according to the message they’re sending to the Street, and then to beef up the EBITDA for VMware by focusing on the larger customers. They touted their ability, for past M&A, to “de-lever” the acquisition costs, by boosting the EBITDA, and their determination to sustain dividends and shareholder value. Again, this is what you’d need to tell Wall Street, and the decision has paid off for the company in stock price since the deal closed.
The EBITDA point is important here because “earnings” (the “E” in the acronym) are improved through cost reduction. That means that steps Broadcom takes to lower costs, including layoffs, will naturally improve EBITDA even if they actually lose some sales in the short term. Any M&A will tend to strike fear into the hearts of customers of the company being acquired, particularly if that company isn’t seen as being in trouble. There’s always a risk that the acquiring company will do something radical.
Broadcom insiders generally agree with the Street version of the story at the high level, but it’s their view that the big factor in Broadcom’s decision was to boost their software revenues in general, and subscription software in particular. The semiconductor space is increasingly competitive, and in that space the company is increasingly focused on AI because that plays well with Wall Street. A recent story, for example, calls Broadcom a kind of if-you-missed-NVIDIA play. Thus, while some of the planners told me that Broadcom was aware of the opportunity for symbiosis between switching chips and VMware software, that wasn’t a near-term priority except perhaps to the extent that it might play in AI hosting.
The big challenge, according to my Broadcom sources, is keeping VMware growing while at the same time achieving significant cost reductions. Estimates of the total number of VMware people to be laid off varies from a fifth to half of total employees, with the majority coming in at around 30%. The reductions are expected to take several years, but the majority of them will likely hit in 2024 because that’s the key period for Wall Street. Broadcom is said to expect that some of the losses will be voluntary, since VMware allowed WFH and Broadcom is asking for a complete return to the office. Still, layoffs always hit morale, and also create customer angst.
Keeping sales not only stable but growing is always a challenge with M&A, particularly when it appears that a lot of the people laid off early are VMware types involved in sales, marketing, and channel support. Even major account people who are senior product types appear to have been cut, though the account management side is apparently less impacted. The client views I have suggest that VMware customers are wary about the loss of some support and sales people they knew, but not so much that they’re actually thinking about jumping ship to another vendor.
Channel sales of VMware stuff is said to be a priority by Broadcom senior management, but there are different views in both companies because early layoffs seem to be removing senior people involved in channel sales and support, in order to slide the “feet on the street” more junior people in under Broadcom people. The biggest fear on both sides of the M&A is that removing a lot of channel marketing senior and staff people will hamstring channel promotion in 2024 even as a recovering economic picture raises opportunity. Broadcom people say they believe they have good partner engagement with Broadcom chips, but most channel programs rely on solution specialists from the vendor side, and there are early signs that a lot of those people will be among the VMware staff laid off.
The product strategy area is a hot topic for both Broadcom and VMware types. There is no question that VMware’s incumbency is with the data center side. The perception that everything is moving to the cloud is wrong, provably at this point, but that doesn’t mean that data center is a growth market. In fact, it’s obvious that the cloud providers are increasingly extending their cloud tools to the premises, not only to the data center but to real-time edge applications. This in my view won’t mean that everything does end up in the cloud, but it does mean that there will be powerful forces trying to erode that which remains in the data center. VMware’s best shot at this was multi-cloud, but they didn’t play their story well at the marketing/positioning level early on. As a result, they missed a chance to make their stuff a kind of portable cloud middleware in the eyes of senior management. I think VMware sales people understood the truth here, but couldn’t make headway against the strong media influence of the cloud providers.
This is where even Broadcom people, including senior management, have concerns. Their pitch to Wall Street promotes multi-cloud and VMware Cloud Foundation, but it’s never a good idea to expect a sales team to counter a lack of insightful marketing/positioning. Some insightful Broadcom types tell me that they believe a major campaign in marketing/positioning should be undertaken by Broadcom in 2024, taking advantage of the fact that the media is always interested in a new story. Most don’t believe the company will take that step, and so they fear that the VCF story may be doomed.
The other multi-cloud issue is the one I’ve raised for years. Despite what you read, the majority of enterprises are not building any true multi-cloud applications. In fact, more enterprises who already have multiple clouds tell me they’re trying to cut back to one provider than enterprises with one provider who say they want to support multiple clouds. The truth is that it’s hybrid cloud, meaning the cloud-to-data-center relationship, that’s more important to users and more valuable to VMware, now Broadcom. That ship, as I’ve noted above, may have sailed at this point.
The edge is a potential pathway back into the limelight for Broadcom now, but Broadcom people aren’t telling me about anything going on in their edge space, and VMware hasn’t really been pushing the edge effectively. Keep in mind that the edge computing that’s already happening is almost totally related to IoT, and is already being supported almost entirely on premises with specialized compute resources. VMware isn’t known for real-time software support and its vSphere stuff isn’t cited by enterprises I’ve talked to as a low-latency solution. It’s interesting that VMware has promoted vSphere in 5G RAN missions, but that hasn’t bled over into enterprise positioning.
I mentioned AI earlier, and it surely is something that could be an opportunity for Broadcom. The problem is that while Broadcom does have AI credentials at the AI-networking level, and while some Broadcom people tell me there’s an AI chip (a family, in fact) in the works, nothing has come out officially. VMware, I think, should have promoted open-source AI as a solution for their data center and cloud software, and that could still be done since AI marketing/positioning is all over the place and largely missing the real enterprise opportunity. I’m not hearing anything specific about introducing AI features at the VMware level, though.
What do customers think about this? I only have comments from 8 Broadcom enterprise customers, and they all expressed a positive view. I have comments from 48 VMware customers, and of that group 12 were positive, while 19 were negative. Among network operators, 4 Broadcom users had positive views and none were negative, while 21 VMware users had positive views and 13 had a negative view. Overall, I’d say that while the customers of the company being acquired in an M&A tended to have a negative view, this deal seems to have generated slightly less skepticism than the average.
It’s hard to read all this at this early stage, but I’m not seeing signs of a collapse here. I’m also not yet seeing signs that the full symbiosis that I’ve touted is being fully appreciated, which means it might not be fully realized. I don’t think VMware’s products will suffer as much as some fear, and I do think that VMware has itself made mistakes in marketing and positioning, mistakes that if corrected by Broadcom, could actually boost VMware products as much or more than Broadcom hopes.
