UK watchdog launches deeper probe into $61B Broadcom-VMware merger
The U.K.’s antitrust regulator said today it will launch a deeper investigation into Broadcom Inc.’s proposed $61 billion acquisition of VMware Inc., a move that seemingly dashes any prospect of the merger being completed with minimal fuss.
The Competition and Markets Authority said today it is launching a Phase 2 investigation into the pending buyout, after Broadcom failed to offer a response to concerns it raised over the merger.
Broadcom announced its pending acquisition of VMware last May, and the CMA announced it was opening a preliminary probe into the deal later that year. The Phase 1 investigation raised concerns that the merger could result in higher prices and hinder innovation in the server market.
The CMA said it is worried that, post-merger, Broadcom might try to leverage VMware’s dominance of the server virtualization industry to restrict compatibility with its software only to servers that rely on Broadcom’s silicon components. These components include Ethernet and Fiber Channel switches and network adapters.
In addition, the CMA pointed out that Broadcom’s competitors in the server market often collaborate with VMware to ensure their new products are compatible with its software. Through these collaborations, they sometimes share sensitive information about new products with VMware. The CMA said it’s worried that Broadcom would therefore be privy to sensitive product data that rival server makers share with VMware. If that happens, it could hurt innovation in the server ecosystem.
Last week, the CMA gave Broadcom five days to provide proposals to address these concerns. “Broadcom informed the CMA that it would not offer such undertakings to the CMA,” the authority said in a statement today.
With the Phase 2 investigation now underway, the CMA has set a deadline of Sept. 12 for a final decision to be made.
The news is likely to frustrate Broadcom, which has repeatedly said in the past that it expects to close the deal by the end of its current financial year, which ends Oct. 30. More recently, it provided an even more ambitious date of May 26, which now appears highly unlikely.
A spokesperson for Broadcom insisted that the company is working constructively with the CMA, and that it still expects the transaction to close in the original time frame. “We will address the concerns raised and demonstrate that the transaction enhances competition and benefits businesses and consumers through increased quality, innovation and choice,” the spokesperson said.
There won’t be any easy answers for Broadcom as it attempts to mitigate the CMA’s concerns, Charles King of Pund-IT Inc. told SiliconANGLE. “The five-day requirement for a reply from Broadcom, particularly in so complex a situation, seems a bit high handed,” he said. “Broadcom’s decision to forgo a response may portend problems or could suggest that the company is working on a broader effort to address all or most of the investigating agencies.”
King did question the logic of the CMA’s concerns though, pointing out that VMware enjoys a dominant market position due to its superior technologies and its sensitivity when working with vendor partners who are fiercely competitive with one another.
“Would Broadcom really jeopardize a $61 billion investment just to capture additional market share for its own products? Doing so seems both shortsighted and unlikely to me,” King said. “In the end, Broadcom may be best served by doing what VMware’s previous majority owners, EMC and Dell, did: provide the means and management for it to act as an essentially independent entity. We’ll have to wait to see whether that becomes part of Broadcom’s playbook.”
Holger Mueller of Constellation Research Inc. said that while the U.K. watchdog’s concerns are valid, Broadcom can address them by changing procedures and safeguarding trade secrets. “I dare say this is more about the U.K.’s CMA making a statement in regards of it still being a relevant regulatory authority,” he added. “I’m sure Broadcom will address its concerns.”
Broadcom has previously claimed to be making progress with regulators on the deal, having received legal clearance in Australia, Brazil, Canada and South Africa. However, it also faces opposition in the European Union, where the European Commission has launched its own in-depth investigation, citing similar concerns to those of the U.K. Moreover, the U.S. Federal Trade Commission is examining the deal closely but has yet to announce a timeline for its decision.
The company certainly has reason to be wary of the CMA ruling against it. Last October, the competition watchdog forced Meta Platforms Inc. to reverse its earlier acquisition of the GIF-sharing platform Giphy, after it ruled that the deal would limit competition and innovation.
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