The European Union has opened an investigation into Broadcom Inc.’s proposed acquisition of VMware Inc. for $61 billion.

The European Commission, the EU’s executive branch, announced the development today.

VMware spun off from former parent company Dell Technologies Inc. last November. This past May, Broadcom announced plans to buy the software maker in a cash-and-stock deal worth $61 billion. Broadcom expects to complete the transaction during its 2023 fiscal year, which started in November.

VMware provides a widely used virtualization platform that enables companies to operate their on-premises servers more efficiently. It also sells software for managing storage systems, network equipment and public cloud infrastructure.

Broadcom, in turn, is a major supplier of data center chips. It sells network interface cards, or NICs, a type of processor used to connect servers to the network of the data center in which they’re located. The company also makes processors for connecting servers to storage equipment.

Many organizations run VMware’s virtualization software on machines that include Broadcom chips. The EU is launching its antitrust probe over concerns that Broadcom may degrade the compatibility of VMware’s software with competing chips made by other suppliers. Additionally, the EU is concerned that Broadcom could block or limit rivals’ ability to use VMware software.

“Our initial investigation has shown that it is essential for hardware components in servers to interoperate with VMware’s software,” said European Commission Executive Vice President Margrethe Vestager. “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.”

As part of its investigation, the EU also plans to evaluate whether the acquisition may raise antitrust issues in other areas.

Broadcom’s NIC chips, which are used to connect servers to data center networks, are facing growing competition from so-called SmartNIC processors. Such processors combine the features of a standard NIC with several advanced capabilities. They can encrypt network traffic, perform deduplication to reduce bandwidth usage and carry out other tasks. 

In 2020, VMware launched an initiative called Project Monterey that focuses on allowing customers to use its software with SmartNIC chips. VMware is collaborating with Nvidia Corp., Intel Corp. and Advanced Micro Devices Inc. on the initiative. The EU is concerned that Broadcom may decrease VMware’s investment in Project Monterey to protect its NIC business from competing SmartNIC products.

Another potential area of concern, the EU has determined, is that Broadcom could bundle VMware products with its other software assets. In 2019, Broadcom obtained a suite of cybersecurity tools by acquiring Symantec Corp.’s enterprise business for $10.3 billion. Through its earlier $19 billion purchase of CA Technologies Inc., Broadcom became a major player in the mainframe software market.

“The combination of Broadcom and VMware is about enabling enterprises to accelerate innovation and expand choice,” a Broadcom spokesman said in a statement today. “We are confident that regulators will see this when they conclude their review.”

The EU will make a decision about Broadcom’s proposed acquisition of VMware by May 11. The launch of the probe comes a month after the U.K.’s competition regulator, the Competition and Markets Authority, launched an inquiry into the transaction.

Broadcom estimates that acquiring VMware would add about $8.5 billion in pro forma EBITDA, or earnings before interest, taxes, depreciation and amortization, to its balance sheet within three years of the deal’s completion. The chipmaker expects software to account for half of its pro forma revenue following the acquisition.

Photo: Broadcom