Broadcom-VMware: 'There is a real cause for concern' - analysts sound warning over $61bn acquisition

The impending takeover of VMware, confirmed last week, is causing unrest in the channel, two analysts have told CPI

Analysts from Gartner and Canalys have weighed in and given their thoughts on the implications following Broadcom's $61bn acquisition of VMware last week.

Channel Partner Insight's sister site CRN spoke to partners who expressed mixed feelings over the deal, prior to its confirmation.

Following the official announcement, CPI has also spoken with lead analysts at Canalys and Gartner for their view of the likely implications for the VMware's channel.

"This has huge implications for VMware. Broadcom has ambitious plans to combine VMware with existing software and security assets from CA and Symantec to create a $20bn enterprise software player. But Broadcom has no experience or track record of doing this," Alastair Elms, chief analyst at Canalys, said.

"Success will depend on how Broadcom executes against this plan, and this isn't clear yet.

"Integrating the different parts of the business will be complex, with some parts overlapping and others lacking clear synergies."

However, Elms said that at the same time, the benefit of the deal is it will give VMware "true independence" from Dell (with Michael Dell selling his 40 per cent stake), allowing it to pursue its goal of being the ‘Switzerland' of the IT industry, and strengthen its alliance partnerships.

"Yet VMware remains heavily dependent on Dell as a route to market - around a third of VMware's revenue comes from its Dell relationship, as an OEM, reseller and distributor," Elms added.

"A big question is whether Broadcom will want to maintain that or reduce its dependence on Dell.

"If Broadcom does seek to reduce its dependence on Dell as a distributor and reseller this will be a benefit for VMWare's other distributors that have lost market share to Dell."

Shaky channel reputation for Broadcom

One thing on everyone's minds is Broadcom's history of handling acquisitions, something Elms believes is one of the biggest worries for partners.

"There is a real cause for concern - Broadcom's history of stripping costs out of CA and Symantec and focusing the businesses on direct enterprise customers will be a worry for partners," he said.

"It sounds like Broadcom plans to expand that direct sales model to around 1,500 VMware accounts, many of whom are currently served by VMware large resellers and GSIs.

"Broadcom claims it will leave the rest of the business to the channel but Broadcom doesn't have a great track record here. There are real fears, based on what's happened at Symantec, that Broadcom doesn't place enough value on a channel model."

However, since the deal was confirmed, Broadcom president Tom Krause, said the group was ready to "embrace" the channel having learned its lesson from CA and Symantec.

Elms continued: "It is pursuing an aggressive target to roughly double VMware's EBITDA over three years, and cost cutting would be an obvious lever.

"If this means cutting R&D, de-investing in the channel, cutting partner resources and investments, and reducing headcount in VMware's own channel management organisation, then VMware's channel business will suffer."

Broadcom's spending priorities

Andrew Lerner, research VP at Gartner, also touched on Broadcom's spending habits with regards to R&D.

"Gartner expects Broadcom to increase pricing for VMware customers and adjust R&D spending, based on Broadcom statements and historical precedent with CA/Symantec," he said.

"Broadcom has publicly stated that it runs acquired software businesses differently than they were operating previously, to create financial returns consistent with their own ‘disciplined' business model and reiterated on their call discussing the acquisition.

"We expect Broadcom will focus R&D on private cloud technologies, most notably NSX, vSAN and vSphere. Note that Broadcom spends a lower amount on R&D as a percent of revenue, compared to VMware."

The positives

Giving insight from another perspective, Lerner remained optimistic that Broadcom has learned from its past.

"Broadcom's decision to rebrand the software group under the VMware moniker indicates a potential adjustment to prior software acquisitions.

"Also, there is potential for co-engineering with Broadcom's existing portfolio leading to product integration enhancements. Some potential examples include: VMware Project Monterey with Broadcom's semiconductor business, and Broadcom's ValuOps with VMware Tanzu.

"Overall, our guidance for VMware customers is to proceed cautiously. Do not assume ‘business as usual' in the long-term. Validate existing inventory to prepare for licensing changes and/or to explore vendor alternatives. Push VMware for written roadmap commitments and add price-caps and exit-clauses for multi-year license agreements."