China holding up Broadcom-VMware deal as South Korea attaches conditions

China is considering stopping the $61bn deal over US chip restrictions and regulators with the Korean Fair Trade Commission are forcing 10 years’ worth of conditions

Broadcom's self-imposed deadline for closing its $61bn deal for VMware is 11 days away, and it is in peril with Chinese government officials as well as the Korean Fair Trade Commission.

The move hit VMware's stock price, with shares falling 5 per cent.

However, with trading reaching $157.81 the price is still well above the $142.50 premium that Broadcom has offered to buy VMware shares from owners.

Beijing is threatening to block the merger, even after it has cleared regulators around the world, in retaliation for new US trade rules that prevent China from receiving advanced chips from Nvidia and Micron, three people told the Financial Times.

The U.S. this week announced tougher measures to limit China's access to high-end chipsets that could fuel breakthroughs in AI and sophisticated technology for its military. The U.S. restrictions hit China, Russia and Iran and blacklisted a Chinese chip designer.

Prior to the Financial Times story, Forrester principal analyst Tracy Woo told CRN recently that it was unlikely China would follow through on its threats to block the deal.

"China has been slowing the process down, but ultimately I don't believe they will block the deal," Woo told CRN via email. "This is a flex from China marking their presence on this major deal."

Chinese officials have not spoken publicly about the deal.

However, according to the Financial Times, "Two of the people said China's merger and acquisition approvals for US companies now required additional consultations with the Ministry of Foreign Affairs and the State Council."

One of the people said "their involvement adds to the political nature of the process".

Broadcom said in a statement that the deal was making progress with regulators and it expected it to close 30 October.

Korean restrictions align with EU commission

Broadcom announced its intention to buy VMware in May 2022, for a 50-50 stock and cash deal worth $61bn. Since then, Broadcom has overcome a lengthy deal investigation by the European Commission, survived a second request investigation by the US Federal Trade Commission and a similar deep-dive examination by the UK's Competition and Markets Authority.

While both European regulators explained how the deal may hurt competition among Broadcom's rival chipmakers, it was allowed to proceed after the European Commission won numerous restrictions from Broadcom.

Among them, Broadcom has been ordered to create a fast-track dispute resolution mechanism with an independent judge that will oversee compliance with European Commission restrictions for a period of 10 years. Broadcom also is still operating under a seven-year consent decree in the European Union after it was found to have carried out illegal sales practices around the world. Under that agreement, which Broadcom struck to avoid prosecution for its market behaviour, the chipmaker must open its books to European Union regulators.

The Korean Fair Trade Commission granted Broadcom its conditional approval to merge with VMware with similar conditions - playing fairly with competitors in the market for another 10 years, according to published reports.

Approval of the acquisition was reported by the Korean Economic Daily, which said the nation's regulators have approved the $61bn acquisition that would pair the San Jose, California-based chip giant with the Palo Alto, California-headquartered virtualisation all-star.

To prevent the newly combined companies from taking advantage of its position of delay or obstruct interoperability certifications, the agency ordered Broadcom to guarantee interoperability for competitors and new businesses for a period of 10 years.

Additionally, Korean antitrust regulators asked Broadcom to provide source code for its Fibre Channel Host Bus Adapters when requested by an independent third party, to maintain interoperability.

CRN has reached out to Broadcom about winning approval in South Korea and the still-pending process in China but did not hear back by press time.

According to published reports, Beijing is threatening to block the merger, even after the deal has cleared regulators around the world. The move is in apparent retaliation for U.S. trade restrictions on advanced chips from Nvidia and Micron, three people told the Financial Times.

The U.S. this week announced tougher measures to limit China's access to high-end chipsets that could fuel breakthroughs in AI and sophisticated technology for its military. The U.S. restrictions hit China, Russia and Iran and blacklisted a Chinese chip designer.

Korea gave Broadcom 60 days to come back to the agency with a framework that would let it meet regulatory conditions.

However, the European Commission has already covered some of the ground in its negotiations with Broadcom to win acquisition approval.

After a month's long investigation, the European Commission found that Broadcom could "foreclose" its only rival for Fibre Channel Host-Bus Adapters (FC HBAs), chipmaker Marvell, had the deal been allowed to proceed without conditions.

"The commitments offered by Broadcom will enable its only rival, Marvell, to continue competing on equal footing and ensure a similar protection for any future entrants," Margrethe Vestager, executive vice president in charge of competition policy for the European Commission, wrote in announcing the decision.

Broadcom agreed to give competitors access to the source code for all of its current and future FC HBA drivers.

In addition, it will give rivals access to interoperability APIs necessary for the competition to develop and certify third-party FC HBAs. It has promised to keep that working for rivals and to give them the same real-time access to information for 10 years.

The agreement also will be monitored by an independent trustee and come with a fast-track dispute resolution process.

"This will allow Marvell and any potential entrant to ensure interoperability with VMware's server virtualisation software and allow them to reuse and modify Broadcom's drivers for its own use," the commission wrote.

"Furthermore, Broadcom committed to implementing an organisational separation between the team working on Broadcom's FC HBAs and the team in charge of third-party certification and technical support.

"It also committed to ensuring protection of confidential information of Marvell and any potential entrant obtained in the context of the interoperability and certification processes."