Broadcom’s plans to acquire VMWare appear to be running into some obstacles as regulators across the world, including those within the European Union, are threatening to block the deal amid concerns that it can restrict competition and innovation within the sector.
In a statement published by the European Commission (EC) yesterday, regulators announced that they have opened an “in-depth investigation” of the deal as they believe that Broadcom could use it to prevent competitors from accessing its critical server virtualization software.
In addition, regulators within the EU are also concerned that Broadcom could degrade the interoperability of rival hardware components with the software developed by VMWare as a way to better position itself within these markets.
The Commission has 90 working days to make a decision about whether it will let the deal pass or not. This jeopardizes the completion of Broadcom’s intended $61 billion acquisition, which was announced in May this year and has already won the approval of VMWare’s shareholders.
Broadcom May Face a Steep Battle with Other Agencies as Well
According to the company’s acquisition announcement back then, it is Broadcom’s intention to merge its existing Broadcom Software Group unit – a recent initiative that sought to develop software that could power the firm’s devices – with VMWare. The two companies will operate as a single unit that will keep the name of VMWare.
Broadcom is expecting to close the deal during its 2023 fiscal year. The timetable seems realistic but the issue at hand at the moment is to persuade regulators to let the deal pass as other jurisdictions are also looking into it including the United Kingdom and the United States.
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On 21 November, the Competition and Markets Authority (CMA) of the UK revealed that it was investigating the acquisition. The procedure started with an invitation to comment on the transaction. All relevant parties who may have a saying in the deal had the chance to send their statements until 6 December.
Meanwhile, according to an exclusive report from CRN, the US Federal Trade Commission (FTC) is conducting a “second request” assessment on the deal. This involves further scrutiny of the acquisition’s impact on the sector’s competitive dynamics, innovation, and labor situation.
For Broadcom, these regulatory hurdles are expected given the size of the deal. However, if one of these regulators imposes strict conditions or decides to halt the transaction altogether, this may prompt the two companies to revise the scope and reach of the operation.
Regulatory Roadblocks Have Often Led to Failed Mergers and Acquisitions
In previous occasions, companies that have engaged in these mega deals have ultimately backed down from their intentions to avoid lengthy and costly legal fights that may not end up producing the expected outcome.
Some prominent examples include NVIDIA’s proposed acquisition of chipmaker ARM for $40 billion citing “significant regulatory challenges preventing the consummation of the transaction” as the main reason for the deal’s implosion.
Meanwhile, Microsoft’s (MSFT) latest move to acquire Activision Blizzard has also encountered roadblocks from regulators across the world including the FTC in the United States, which has moved to block the transaction amid concerns that the company founded by Bill Gates will deny rivals from commercializing the company’s popular videogames for their consoles.
In September this year, the US Securities and Exchange Commission (SEC) accused VMWare of misleading investors by pushing forward its revenues to future quarters by delaying the delivery of licenses to its customers.
This resulted in tens of millions of dollars being moved from one quarter to the other to somehow tweak the firm’s financial performance.
“As the SEC’s order finds, by making misleading statements about order management practices, VMware deprived investors of important information about its financial performance”, the agency commented in a formal statement published back then.
VMWare received a slap on the wrist for its actions as it consented to a cease-and-desist order and received an $8 million fine.
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