Everything Broadcom CEO Hock Tan Has Said About The VMware Deal

The road To VMware’s future might go through Broadcom CEO Hock Tan. Here is what he has said so far about what lies ahead for the software virtualization powerhouse.

While economists, analysts, traders and executives from across the IT landscape speculate about what is next for VMware, the only person who could know for sure is the architect of the “surprise” offer that shocked the channel, as well as a lot of VMware employees: Broadcom CEO Hock Tan.

For his part, Tan has been talking, at least in general terms about where he sees the value of VMware, where there is a need for change, and where Broadcom can take the software virtualization leader, should the $61 billion deal make it across the finish line.

Tan spoke on a conference call with investors on May 26 the day the deal was announced. He spoke on a call with VMware employees the next day. On Tuesday, he appeared at a Bank of America event where he answered questions about the deal. That same day he appeared on CNBC’s “Mad Money” with Jim Cramer.

Broadcom has published transcripts of all but one of these encounters: the conference call with VMware employees. Tan and Broadcom Software President Tom Krause instead published a letter after the town hall, in which they recapped the conversation.

“We appreciate that VMware’s culture is built on execution, passion, integrity, customers and community. We too share values like these. At Broadcom we prioritize accountability – to our customers, our partners, our shareholders and each other,” the men wrote in a co-signed letter.

Tan offered more color around his commitment to shareholders in comments he made to Cramer in the days that followed.

“The way we think about why we issue dividends, even as we keep on the strategy of acquiring great assets, it’s simply that we feel while relying on our shareholders to think of us as a long-term investment, as a long-term play, we feel that we are rewarding them as we progress, as we advance,” he told the “Mad Money” host. “Which is why we save, we put aside half of free cash flow as a return of dividends, and the other half in return, they let us keep to do the next deal and grow the business.”

The VMware acquisition is on hold until a 40-day “go shop” provision winds down. The VMware board of directors and its chairman Michael Dell have given the deal their blessing, barring a better offer.

Click through the slideshow to see a potpourri of Hock Tan’s comments about the blockbuster deal.

May 26 – Investor Presentation To Discuss VMware Deal:

‘By adding VMware, we will bring significant scale to Broadcom’s software business’

“As you know, we never embark on an acquisition unless we feel our core is very strong and solid. Irrespective of what you might think of where we are in the semiconductor cycle today, I do want to reassure you the fundamentals of our business, both in semiconductors and in software have never been stronger.

We have just reviewed how solidly grounded these businesses are. So let me discuss now what we believe is a very unique opportunity to take our company and its business to the next level … By adding VMware, we will bring significant scale to Broadcom’s software business, and reinforce our position as a premier provider of mission-critical platform solutions to enterprises globally.

One of the reasons we became very interested in VMware was because of its world-class team, engineering-centric culture and strong customer and partner relationships. VMware importantly aligns incredibly well with the Broadcom strategy. And it has all the attributes we seek in the platforms we operate. VMware is the leader in big, growing and global markets. The company is an indispensable provider for mission critical platform technology with a blue-chip customer base and an incredible innovation engine.

Together with Broadcom’s existing software portfolio, we are positioned to create a uniquely powerful value proposition for enterprises, enabling them to develop, deploy and manage their applications securely, seamlessly across every type of cloud and to accelerate the application life cycle for their workloads.

And in addition to adding new dimensions of value for customers, VMware also has an ideal profile that will enable us, Broadcom, to create compelling value for our shareholders. As part of Broadcom, our target is for VMware to contribute approximately $8.5 billion of EBITDA once we have fully integrated the company onto our platform. With more than $40 billion of pro forma revenue, and this is pro forma on fiscal ‘21, we are creating one of the world’s largest infrastructure technology companies.

Our semiconductor business is one of the largest semiconductor businesses globally with 17 key franchises. It is highly profitable. And as I just reviewed, continues to post very strong organic growth. Revenues have grown from $15.6 billion in 2017 following the acquisition of classic-Broadcom to $20.4 billion in fiscal ‘21, all this growth being organic. With the addition of VMware, our software business will now represent close to half of our total pro forma revenue with approximately $20 billion of software revenue for fiscal ‘21. With this type of scale and a continuing commitment to R&D and innovation, we will be able to significantly invest and fund new innovative solutions that will support our customer base.

Regarding Changes To VMware Software Licensing Deals

From an economic point of view, whether it’s perpetual or subscription, frankly, is the same. But we want to make it very consistent with the way we run the model. And based on this, we are, in a sense, restructuring the contracts, perpetual to subscription. And you — that’s why you, depending on where you see it, you’ll see a slower growth at the beginning, if any, followed by a more rapid growth as we convert more to subscription.

Regarding Synergies And How VMware Can Grow Faster

We’re dancing around the central issue, which is we will keep — and we have seen us — we invest in R&D and hardware we do a lot of that if we have to. And it’s all at the end of the day, this is a great franchise. In terms of monetization, it’s all about execution. And that’s, in a nutshell, what we’re seeing here. We believe we will execute much, much different, hopefully better, than what we have been seeing so far.

Letter to VMware Employees Signed By Hock Tan

‘By bringing an iconic pioneer like VMware into the Broadcom family, we will be able to reimagine what we can deliver to our customers.’

On behalf of all of us at Broadcom, we wanted to reach out directly to share our excitement about coming together.

To tell you a little more about Broadcom, we are a leading designer, developer and global supplier of a broad range of digital and analog semiconductor and infrastructure software solutions. As you may be familiar, over the last several years, we’ve been executing on our strategy to build the world’s leading infrastructure technology company, by both investing in R&D and integrating established, mission-critical platforms, like Symantec, CA Technologies and now VMware, into our company. By bringing an iconic pioneer like VMware into the Broadcom family, we will be able to reimagine what we can deliver to our customers.

We’ve long admired VMware for your enterprise software leadership. In fact, one of the reasons why we became interested in this transaction was because of your world-class team, known for engineering prowess and strong customer and partner relationships. Like VMware, Broadcom has an engineering-first, innovation-centric culture.

Following the closing of the transaction, the Broadcom Software Group will rebrand and operate our existing infrastructure and security software solutions as VMware, a testament to our excitement around what the future holds.

While we’ve only just announced this transaction, we look forward to your talented team joining our company, and for Broadcom Software’s compelling next chapter as VMware.

Tomorrow at 8 a.m. PT, we will be participating in a town hall where we plan to share more about the history of Broadcom and why we’re enthusiastic about what’s ahead for our two companies.

June 2, Letter To VMware Employees Co-Signed By Hock Tan And Tom Krause (pictured)

‘We have a proven track record of successfully integrating the companies that we acquire, providing them with the resources needed to ensure sustainable growth and development as part of Broadcom.’

It’s been an exciting week. Since we announced the transaction, we’ve heard from shareholders, analysts, partners, customers and employees of both companies. One thing is clear in our conversations: there is a lot of enthusiasm for what the future of infrastructure technology holds once our two companies are combined.

We had a wonderful time speaking with so many of you at the town hall meeting last week. It was especially great to be on your campus in Palo Alto – just a short drive from our headquarters in San Jose. For those of you who couldn’t tune in live, we wanted to follow up with some highlights of what we discussed.

As we shared, Broadcom is proud to be an American company, incorporated in Delaware like VMware, with deep roots tracing back to the early days of the microelectronics industry and a strong heritage of acquiring and investing in best-in-class technology across the semiconductor industry. At Broadcom, we are always looking for ways to drive even more innovation and improve and expand our product offerings, and in recent years, we’ve looked to supplement our leadership in semiconductors by growing our presence in infrastructure software.

VMware aligns incredibly well with Broadcom’s strategy, and it has all the attributes that we seek in the platforms that we operate. The company serves a large and growing market. It’s an indispensable provider of mission-critical platform technology, has a blue-chip customer base and is an incredible innovation engine. Of course, none of this would be possible without the VMware team, or the strong customer and partner relationships that you’ve built.

In terms of how our values align, we appreciate that VMware’s culture is built on execution, passion, integrity, customers and community. We too share values like these. At Broadcom we prioritize accountability – to our customers, our partners, our shareholders and each other.

To that end, we have a proven track record of successfully integrating the companies that we acquire, providing them with the resources needed to ensure sustainable growth and development as part of Broadcom. In fact, we already held our first integration planning meeting with the VMware management team, and over the coming weeks and months, we will be working closely together to ensure we can hit the ground running once the transaction is completed. Our shared engineering-first, innovation-centric cultures are sure to enable a seamless transition.

The attached infographic showcases some of the positive reactions we’ve heard and seen to-date. We’re so pleased with the encouraging response so far, but we’re even more excited about what comes next. Together, we will be able to reimagine what we can deliver to our customers.

June 7. Interview At The Bank of America Securities 2022 Global Technology Conference

‘So to us, it’s a great asset and it was actionable, so we bought it. And now, we are going to make something out of it, and that’s when we talk about focus and execution.’

Question: “With the software deal that you recently announced, the mix of the business will kind of be even – semiconductors and software. Is that by design? Is it just coincidence? And if you were to kind of fast forward five or six years from now, is this do you think – is the right mix for Broadcom?”

We are not really designing for a mix of hardware and software. As I mentioned many times, it is about the asset – the quality of the asset. And VMware, as we indicated by all measures, is a very high quality asset with all the attributes we seek in an asset that we acquire. It’s a leader in growing global markets on its platform, bluechip set of customers, and lastly, a great bunch of engineers with a very innovation-centric culture, very much like us. In many ways, very similar. So to us, it’s a great asset and it was actionable, so we bought it. And now, we are going to make something out of it, and that’s when we talk about focus and execution.

And the debt on the balance sheet, at what point – so I understand, versus EBITDA generation it’s extremely manageable. It is maybe in the lower half of the industry. But just from an absolute dollar perspective, does it concern you ever, to have so much debt on the balance sheet?

Not really, because we measured against our ability on a sustained basis, obviously, to generate earnings and cash flow. Right now, before VMware, Broadcom has just below $39 billion of gross debt. This year, we are generating north of $20 billion of EBITDA. I think we are solidly investment grade to handle that kind of debt. Now we buy VMware, we are prudent enough to put in a mix of stock and cash. So that cash requires additional debt, but we expect the incremental earnings that we will generate out of VMware will again easily carry that incremental debt.

June 7, Interview with Jim Cramer on CNBC’s Mad Money

Cramer: Hock, Congratulations. This deal, I think is the capstone. Tell us about what will make your business 50 percent software, because that’s so exciting to so many of us who appreciate the growth that you’ve always had?

Right. And we think it’s a great asset and it’s a great acquisition for us. It’s very incredibly aligned with our strategy of building the leading provider of infrastructure technology globally. And this acquisition has all the attributes we see. They are the leader in the big and growing global markets, blue chip customers, and they have incredible talent of engineers, very innovation-centric culture, which is exactly what Broadcom is all about.

Now, do you think there’s enough overlap with VMware and your current Broadcom salespeople that you’ll be able to make it so that the channel you’ll be able to offer both hardware and software – can that work?

It’s largely software. Largely software. Because our hardware tends to be sold through systems integrator OEMs. But software, absolutely. Combined with Broadcom existing software portfolio, we’ll create a uniquely powerful value proposition to our enterprise customers, one that will enable them to effectively develop, run, manage their applications seamlessly, securely, across from on-prem, private cloud to multi-cloud.

Now, one of the things I’ve been saying on Mad Money is we’re looking for companies that make things, do stuff, that reward shareholders and have a reasonably priced stock. Hock, I’ve got to tell you, in the same breath of buying VMware, you immediately talked about what you were going to do for existing shareholders. Why can’t others out here see what you do in terms of your regularization that the shareholders own the company?

Well, you know, we never lose sight of this focus. One is that we’re there for customers. We’re there to make sure employees have great opportunities and succeed. But equally, we’re there to deliver consistent compelling value to our shareholders. They are a big part of the reason we exist.

And you immediately talked about buyback, that dividend is a very positive division of cash flow. People again, out here, Hock they don’t think like that. Why do you recognize that to build that stable, stable group of shareholders allows you to do these great deals, and then you do them accretively, it’s not a waste of their money.

Absolutely not. In fact, the way we think about why we issue dividends, even as we keep on the strategy of acquiring great assets, it’s simply that we feel while relying on our shareholders to think of us as a long-term investment, as a long-term play, we feel that we are rewarding them as we progress, as we advance. Which is why we save, we put aside half of free cash flow as a return of dividends, and the other half in return, they let us keep to do the next deal and grow the business.

All right, well, my colleague David Faber said you must ask Hock if he’s out of deals. Now he’s buying companies as big as VMware, is there anyone left?

Oh I’m sure there will be, but I’m focused on one deal at a time, and this is it, VMware.