VMware-Broadcom Deal Includes Gigantic Termination Fees

The blockbuster $61 billion acquisition deal currently on the table between Broadcom and VMware has a $1.5 billion and $750 million termination stipulations.

Both VMware and Broadcom are willing to put their money where their mouth is in terms of commitment to the historic $61 billion acquisition that would see Broadcom buying VMware to lead its enterprise software charge.

So much so that if the proposed deal is terminated by either party–including if regulatory clearances aren’t granted–Broadcom will be forced to pay a whopping $1.5 billion termination fee to VMware.

Additionally, the current agreement provides VMware with a 40-day “go-shop” provision, which allows VMware to seek out other suitors and potentially enter “negotiations with parties that offer alternative proposals” until July 5.

If VMware decides to select another company’s acquisition offer before July 5, VMware will have to pay Broadcom a $750 million termination fee. If VMware picks another offer after the July 5 deadline, VMware must pay Broadcom $1.5 billion as a break-up fee.

[Related: Broadcom’s $61 Billion Buy Of ‘Iconic’ VMware: 5 Big Things To Know]

This week, San Jose, Calif.-based Broadcom unveiled its plan to acquire VMware for a whooping $61 billion with hopes to complete the deal by the end of its fiscal year 2023. If completed, Broadcom’s Software Group will rebrand and operate as VMware, which will incorporate Broadcom’s existing infrastructure and security software solutions.

The transaction is subject to the receipt of regulatory approvals and other customary closing conditions, including approval by VMware shareholders.

Broadcom’s Acquisition Of Qualcomm Was Halted By Regulatory Issues

One potential hurdle in the deal which caused an issue in Broadcom’s previous planned acquisition of Qualcomm is governmental regulatory issues.

In 2018, former President Donald Trump’s administration blocked Broadcom’s proposed $121 billion acquisition of fellow semiconductor vendor Qualcomm, citing national security issues regarding, at the time, Singapore-based Broadcom’s links to China.

President Trump in a presidential order wrote that there is “credible evidence” that Broadcom‘s proposed move to exercise control of Qualcomm “might take action that threatens to impair the national security of the United States.”

Additionally, Broadcom’s most recent rumored acquisition of SAS Institute fell through.

Last year, it was reported that Broadcom was in talks to acquire big data analytics company SAS Institute for somewhere in the range of $15 billion to $20 billion. The SAS Institute deal ultimately fell through.

GlobalData Principal Analyst David Bicknell said that although U.S. regulators will take an interest in the deal, the acquisition most likely will not be stopped.

“Although a chip company buying a cloud software company wouldn’t ordinarily raise US regulatory concerns, the takeover of a leading-edge US cloud software vendor by a [former] Singapore-based company with very strong links to China might prompt regulatory interest given today’s geopolitical backdrop. Still, it’s unlikely to scupper the deal,” said Bicknell in a research note.

“After having its fingers burnt by regulators in its failed bid to buy Qualcomm, Broadcom will expect this deal to go through,” Bicknell said. “ But it shouldn’t be surprised if regulators take a close interest.”

Broadcom’s business in Hong Kong and China is primarily done through third-party contract manufacturers like Foxconn, which uses Broadcom’s products to make goods for its U.S. smartphone customer. Broadcom has been a supplier and partner to the U.S. government for many years.

The deal has been unanimously approved by the boards of directors from both VMware and Broadcom.

Biggest Details Of Broadcom-VMware Deal

Broadcom will acquire all outstanding shares of VMware in a cash-and-stock transaction that values VMware at approximately $61 billion, which is based on the closing price of Broadcom common stock on May 25, 2022.

Broadcom was able to obtain commitments from a consortium of banks for $32 billion in new, fully committed debt financing. Broadcom will also assume $8 billion of VMware’s net debt.

If completed, current Broadcom shareholders would own approximately 88 percent and current VMware shareholders will own approximately 12 percent of the combined company.

The transaction is expected to add approximately $8.5 billion of pro forma EBITDA [earnings before interest, taxes and amortization] for Broadcom within three years of closing.

Broadcom CEO and President Hock Tan said the acquisition of the “iconic” company will take his company to new heights with the Broadcom Software Group being rebranded and operated as VMware.

“Building upon our proven track record of successful M&A, this transaction combines our leading semiconductor and infrastructure software businesses with an iconic pioneer and innovator in enterprise software as we reimagine what we can deliver to customers as a leading infrastructure technology company,” said Tan in a statement.

VMware CEO Raghu Raghuram said combining the assets of VMware and Broadcom will create a “remarkable enterprise software player.”

“Collectively, we will deliver even more choice, value and innovation to customers, enabling them to thrive in this increasingly complex multi-cloud era,” said VMware’s CEO Raghuram.