Tech,  Wealth

KKR Swoops in to Save VMware’s EUC Division: Is the Tech M&A Market Back?

“Is the capital market poised to commence its ascent?

Yet another monumental merger has been unveiled. On February 27th, KKR disclosed an agreement with Broadcom to acquire its EUC unit. The total transaction valuation will approximate US$4 billion (28.8 billion yuan). Closure of the transaction is anticipated within 2024, contingent upon regulatory approvals.

This transaction ensues as a consequence of Broadcom’s epochal “Merger of the Century” in 2023. In November 2023, Broadcom consummated the acquisition of VMware for US$69 billion, marking the largest merger and acquisition in the semiconductor industry. While VMware may dwell in obscurity to the layman, its eminence in cloud computing prevails as the global vanguard in virtualization software and private clouds.

Following the acquisition of VMware, Broadcom orchestrated a profound “surgical” operation, reshaping its original business framework. The EUC division procured by KKR formerly constituted one of VMware’s primary enterprises, yet was divested and vended by Broadcom as a non-core entity. This prospect garnered interest from numerous private equity institutions. Apart from KKR, EQT AB, a preeminent European PE entity, and ThomaBravo, another American PE conglomerate, have expressed keen interest. Reports at the conclusion of 2023 suggested that Broadcom appraised the EUC unit at approximately US$5 billion, surpassing KKR’s disclosed transaction valuation.

Since 2024, substantial mergers and acquisitions have proliferated domestically and internationally. This may signal the resurgence of the primary market subsequent to a two-year nadir. Domestically, on January 28th, Mindray Medical announced the acquisition of Huitai Medical for 6.65 billion yuan. This rare “A eats A” large-scale merger garnered considerable attention. In overseas markets, KKR’s transaction marks the fifth multi-billion dollar or larger merger and acquisition in 2024. At the onset of the year, HPE acquired Juniper Networks for US$14 billion, while Synopsys acquired Ansys for US$35 billion, catalyzing a surge in technology mergers and acquisitions.

Botong relinquishes his filial ties.

Broadcom, as one of the world’s foremost semiconductor behemoths, has perennially exhibited fervor for mergers and acquisitions. Over the past decade, Broadcom has acquired Symantec, CA Technologies, Newport Communications, SiByte, Silicon Spic, NetLogic Microsystems, and a myriad of other corporations, culminating in transactions worth tens of billions, or even hundreds of billions, of dollars. So pervasive is this propensity that jests abound within the media: Chen Fuyang (Broadcom’s head) is presumed to be ceaselessly scouring screens for prey. In 2017, Broadcom endeavored to acquire Qualcomm for US$130 billion, albeit thwarted by US regulators.

Conversely, in the eyes of many, Broadcom’s M&A track record harbors a litany of blemishes. Broadcom espouses the “acquire-slash-and-burn” ethos, engendering chaos wherever it treads.

In the case of the VMware acquisition, Broadcom’s modus operandi remains unaltered.

VMware, established in 1998, is a trailblazer in virtualization technology. Virtualization technology, essentially employing software to emulate hardware functions and engender “virtual computers,” constitutes a cornerstone of cloud computing. VMware stands as a progenitor of the cloud computing era, boasting myriad industry-leading product lines. The EUC division procured by KKR encompasses remote desktop solutions, epitomized by the renowned virtual desktop product Horizon and the enterprise unified terminal management platform Workspace ONE.

VMware’s remote desktop system facilitates seamless access to the company’s intranet via myriad terminals, affording users the ability to undertake a plethora of tasks, including email correspondence, coding, and file management, irrespective of location. In essence, this infrastructure underpins remote work, which burgeoned during the COVID-19 pandemic.

Why, then, did Broadcom opt to divest it?

Primarily, Broadcom, with a market capitalization exceeding US$600 billion, evinces scant enthusiasm for VMware’s EUC division, valued at a mere several billion dollars. Chen Fuyang’s primary impetus behind the VMware acquisition was to annex the latter’s hybrid cloud business, deeming VMware’s ancillary ventures non-core.

Secondarily, Broadcom amassed over US$30 billion in debt during the VMware acquisition, necessitating expeditious debt repayment. In Broadcom’s calculus, divesting of the relatively diminutive EUC division facilitates prompt debt alleviation. Besides the EUC division, Broadcom is also divesting VMware’s security software subsidiary Carbon Black.

Broadcom executed the VMware acquisition with surgical precision. In the inaugural week post-acquisition, Broadcom initiated sweeping measures, encompassing the termination of over 2,000 positions and the cessation of more than 50 product lines. Broadcom avowed its intention to augment VMware’s EBITDA twofold over the ensuing three years.

Under such circumstances, the erstwhile outcast EUC division was enshrouded in tumult. Since the divestiture announcement, the VMware EUC division has languished, with collaborations grinding to a halt. Apprehensive partners contemplate migrating to rival products, such as Microsoft’s Azure Virtual Desktop.

KKR, entering the fray at this juncture, assumes the mantle of the white knight, eliciting a warm reception from employees and stakeholders.

The remote desktop solution spurned by Broadcom is a veritable treasure in KKR’s estimation. KKR envisages remote work not as a transient expedient engendered by the COVID-19 pandemic, but as an enduring, immutable trend.

Bradley Brown, KKR’s managing director overseeing the deal, espouses the belief that efficient remote work, facilitated by ubiquitous mobile devices and software layers, constitutes an indelible facet of the future work paradigm. Bradley Brown further prognosticates that the increasingly intricate IT milieu confronting modern enterprises necessitates software tools to enhance productivity.

KKR partner John Parker posits that the VMware EUC division occupies a leadership position in a burgeoning market segment, with sustained demand for its flagship products. John Parker asserts that post-independence, the VMware EUC division will burgeon into a world-class enterprise.

Evidently, in KKR’s estimation, the VMware EUC division represents a prospective asset endowed with substantial growth prospects, warranting substantial investment.

The prevailing perception of PE mergers and acquisitions as ‘barbarians at the gate,’ predicated on radical cost-cutting measures and asset liquidation, finds scant resonance in KKR’s approach. KKR pledges autonomy for the acquired unit, refraining from cost-cutting initiatives and committing to augment research and development endeavors, notably enhancing customer relations. KKR’s proclamation is perceived as a restoration of the erstwhile partner program, auguring well for myriad small-scale clients.

KKR further pledges continuity for the extant team, entrusting operational oversight to the incumbent management, helmed by Shankar Iyer. KKR further undertakes to institute an expansive employee stock ownership plan, envisaging the workforce as stakeholders in the enterprise.

Thus, KKR avowedly seeks to fortify the VMware EUC division, fostering its autonomy and infusing fresh capital. Shankar Iyer lauds the transaction as heralding a new epoch for the EUC sector, prognosticating manifold opportunities for stakeholders.

Reaping tens of billions from a solitary transaction

KKR boasts a storied history of conducting multi-billion-dollar technology acquisitions in the software domain.

PE institutions have long gravitated toward the software sector, amassing revenue rivalling that of premier software conglomerates. Thoma Bravo, for instance, ranks as the fifth-largest software entity globally, with revenue from its software portfolio exceeding US$26 billion. Vista Equity ranks seventh, with revenue surpassing US$23.6 billion.

KKR presides over a formidable software empire, embarking on multi-billion-dollar M&A ventures in traditional software, SaaS, and cloud services.

In 2019, KKR acquired Corel, a Canadian productivity and business software firm, in a deal exceeding US$1 billion. In 2021, KKR acquired IT services firm Ensono for approximately US$1.7 billion. Subsequently, KKR allocated US$4 billion toward the acquisition of cybersecurity firm Barracuda Networks in 2022.

Software industry mergers and acquisitions harbor peculiarities. While PE institutions traditionally evince a proclivity for established entities with stable cash flows, the software domain, straddling maturity and rapid technological evolution, demands innovation.

KKR’s history of software company acquisitions seldom embodies the traditional ‘slash-and-burn’ paradigm associated with PE acquisitions. Upon acquiring Corel in 2019, KKR guaranteed no layoffs and pledged substantial capital infusion to foster business expansion.

Buoyed by its extensive ecosystem, KKR empowers portfolio companies, fostering synergy and innovation. Alludo, under KKR’s aegis, boasts Parallels, a virtualization software product, dovetailing seamlessly with VMware’s EUC business.

KKR’s largest foray into the software realm materialized in the US$8.5 billion acquisition of BMC in 2018. BMC, specializing in automation and service management solutions, raked in sales revenue exceeding US$2 billion in 2022. KKR stands to accrue substantial gains from this venture, with BMC’s market valuation projected to exceed US$20 billion post-IPO.”

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