VMware-Broadcom Edition

$69B

Broadcom purchased VMware in November 2023 for $69B ($61B in stock and cash buyouts for existing shareholders in addition to taking on $8B of VMware’s debt.)

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Prior to the Broadcom acquisition, Pat Gelsinger went on an absolute M&A tear at the end of his tenure as CEO of VMware before leaving to lead Intel in 2021, acquiring 24 companies from 2017-2020. What was the rationale behind this?

VMware’s product expertise was in virtualization and networking, which meant its stronghold was in the datacenter. The rise of cloud computing and containerization shifted the market dynamics away from VMware’s historic areas of strength. Gelsinger’s M&A was an attempt to strategically rethink their portfolio investments to remain relevant in a cloud-based / Kubernetes-driven world.

Some of the notable acquisitions include:

1. Pivotal

Acquired: Dec 2019
Acquisition Price: $2.7B
Related RedMonk Research: Pivoting, Pivotal: transactions, Kubernetes, and taking an axe to long term support.

Pivotal’s Cloud Foundry-based products and services were (re-)acquired to help bolster VMware’s portfolio around enterprise application development and modernization.

2. Carbon Black

Acquired: Oct 2019
Acquisition Price: $2.1B

Carbon Black strengthened VMware’s cloud-native security offerings.

3. Heptio

Acquired: Nov 2018
Acquisition Price: $550M
Related RedMonk Research: The Kubernetes World: VMware Acquires Heptio

Heptio, founded by two of the creators of Kubernetes, was a strategic acquisition designed to help VMware respond to the rise of containerization.

4. CloudHealth

Acquired: Aug 2018
Acquisition Price: $500M

CloudHealth’s value prop was around cloud visibility and cost management, which was key to VMware’s multi-cloud play.

5. Wavefront

Acquired: May 2017
Acquisition Price: $375M

Similarly, Wavefront played into VMware’s multi-cloud strategy with cross-cloud analytics and monitoring.

6. Bitnami

Acquired: May 2019
Acquisition Price: undisclosed
Related RedMonk Research: Container Trends: Plans, Orchestration and CI – A Dataset from Bitnami

Bitnami’s acquisition was centered around helping make it easier for VMware customers to package and deploy apps.

7. SaltStack

Acquired: Oct 2020
Acquisition Price: undisclosed
Related RedMonk Research: Compliance as Code: The Configuration Management Ecosystem

SaltStack’s configuration management tools were acquired to help with automation and infrastructure orchestration.

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The commonality across all these acquisitions is that they were designed to help VMware branch out from an on-prem VM-based portfolio into something that could adapt to cloud and containerized workloads. Rationalizing this expanded portfolio and trying to communicate a new vision for the brand proved to be challenging.

Despite the creation of the Tanzu brand umbrella, at times it felt like the company struggled to find a cohesive offering. VMware seemingly swung back and forth between wanting to offer customers choice and modularity on one hand, and then struggling to help them navigate the portfolio’s sprawl on the other.

Under Broadcom, the portfolio has been reduced to two primary offerings: VMware Cloud Foundation and VMware vSphere Foundation. While there are other offerings at the company on top of these SKUs, like VMware’s Private AI (watch more here), but overall the company is taking a vastly simplified approach to the level of choice available in their portfolio.

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There have been reports of eye-watering price hikes post-merger. While they feel startling, it should not be surprising.

Broadcom’s 2021 investor day highlighted their go-to-market strategy with this line on a slide: “70%+ of total ARR from ~600 strategic accounts.”

But the upselling is not confined to just the top-tier accounts.

“Broadcom CEO Hock Tan expects his company’s VMware business to grow double-digits for the rest of the year as Broadcom’s sales teams work on upselling the 2,000 strategic customers he inherited on the parts of the VMware stack they don’t use.”
– O’Ryan Johnson

Broadcom’s overall revenue guidance for the fiscal year is $50B, $20B of which are expected to come from software. In the Q1 earnings call, Tan’s answer about software revenue growth said “the star of this show is the accelerating bookings and backlog we are accumulating on VMware.”

Stardom for investors is not always popular for customers, especially locked-in customers. Listen to more analysis on the implications of this strategy from this Civo Navigate panel featuring Tim Banks, Mark Boost, and Dinesh Majrekar.

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So where do these numbers leave us? Broadcom is driving their acquisition ROI via core VMware accounts that are unable to migrate their workloads. While many of the technologies acquired under Gelsinger’s leadership have been incorporated into the VMware platform, the modernization narratives around them are not currently the focus area for Broadcom.

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Disclaimer: VMware by Broadcom is a RedMonk customer.