EC to Confront Broadcom About VMware Merger

Broadcom (Nasdaq: AVGO) has hit a snag in Europe over its planned acquisition of VMware (NYSE: VMW). Specifically, Reuters reports that the European Commission (EC) plans to issue a warning to Broadcom about the chip firm’s potential for anticompetitive tactics related to the $61 billion acquisition, which is set to be closed this year.

The news comes after the EC’s extensive examination of the deal, which began in December 2022 and focused on the potential for Broadcom to restrict competition in the market by compelling buyers to opt for its own network interface cards (NICs), Fibre Channel host bus adapters (HBAs), and storage adapters in order to take advantage of VMware virtualization software in those areas of IT.

SmartNICs in Focus

The EC also stated in December that it was exploring the potential for Broadcom to hinder development of technology in the area of SmartNICs, aka data processing units (DPUs). The European regulator expressed concern that, according to its press release, “Broadcom may decrease VMware's involvement in Project Monterey to protect its own NICs revenues. This could hamper innovation to the detriment of customers.”

Project Monterey, recall, is an initiative announced in October 2021 that aims to enlist server and DPU partners to improve the efficiency of IT workloads. The project initially included Dell, HPE, and Lenovo on the server OEM side and NVIDIA, Pensando, and Intel on the DPU side.

Ultimately, the EC is worried that Broadcom will use pricing and restrictive integration of VMware products and services, including those emanating from the Project Monterey research, to favor its own chips.

Not a First for Broadcom

This isn’t the first time the EC has put Broadcom in the dock. Back in 2019, the EC in its own words “took issue with certain exclusivity or quasi-exclusivity and leveraging arrangements imposed by Broadcom in relation to SoCs for TV set top boxes, xDSL and fibre modems.” The upshot was that Broadcom promised the EC not to offer reduced pricing to OEMs as a means of inducing them to buy Broadcom products.

Now the stakes are even higher, and Broadcom may be compelled again to produce commitments in writing to the EC in order to gain approval for the VMware deal.

Apparently, it’s going to be a long process, though the companies say they plan for the merger to close soon. Already there have been two important slowdowns: First, the EC reportedly paused its inquiry earlier this month because it needed additional input from Broadcom (perhaps commitments?) that the regulator hadn’t yet received. Then Broadcom and VMware decided to extend the final date for their agreement to be completed to May 23, 2023. That noted, the EC has stated that its final decision on the merger will be issued by June 7, 2023.

Meanwhile, the U.S. Federal Trade Commission and the UK Competition and Markets Authority are poking into the specifics of the merger with a nose for anticompetitive signals.

What to Expect?

So far, Broadcom CEO Hock Tan has stuck to a script that allows VMware free rein after the merger. In an interview with FedScoop sponsored by Broadcom, Tan said:

“With our planned acquisition of VMware, we see VMware and its multi-cloud strategy as critical to the success of this sort of flexibility, because it provides CIOs with the tools, capabilities and know-how to control their own destiny, giving them greater choice without having to refactor the applications that run workloads.”

This appears to be a specific promise that VMware’s Tanzu development environment and related wares will be left as is. That has led some observers to believe that the EC’s concerns aren’t warranted.

Still, Broadcom’s record of putting pricing pressure on OEMs indicates that it could find ways other than toying with interoperability to stifle competition from the likes of NVIDIA. Also, Broadcom could believe that enterprise reliance on VMware solutions will ensure loyalty to those wares even if Broadcom does make it advantageous to use its underlying hardware over others’, at least in some scenarios (storage and Fibre Channel?).

It's these subtler tactics that could ultimately hurt VMware and its customers. Whether the EC’s reservations about this deal afford protection from that potential, or whether regulatory concerns beach the deal entirely, remains to be seen.

The EC had no comment to offer as of this writing. Broadcom and VMware did not respond to requests for comment.