Hock Tan, the executive who built Broadcom into a $250bn tech giant through a series of bold acquisitions, has signalled more dealmaking after his $69bn move for VMware, as the 71-year-old signs on for another five years as chief.
In an interview with the Financial Times, Tan said Broadcom would still look at semiconductor acquisitions, even after its hostile $142bn bid for Qualcomm, was blocked in 2018 by then-US President Donald Trump.
Broadcom’s bid for datacentre software provider VMware is also being examined by competition enforcers in the US, Europe and — since last week — the UK.
Although mega tech mergers came with heightened scrutiny these days, acquisitions remained a “key part of our strategy”, Tan said. Broadcom maintained a “select” list of “companies with assets that we would love to buy”, Tan said. “On that list, there are some in semiconductors, there are some in software.”
Whatever Broadcom’s next big move, Tan intends to lead it even as he coasts past the age at which most executives retire. “I just signed up for another five years,” Tan said. “I’m having too much fun.”
Tan, who was born in Malaysia and moved to the US to study at Massachusetts Institute of Technology, has worked in tech since the early 1990s. He was hired to run what is now Broadcom in 2006, a year after private equity firms KKR and Silver Lake paid $2.66bn for Avago Technologies, which originated in Hewlett-Packard’s semiconductors division in the 1960s.
After going public in 2009, Avago grew rapidly via acquisition, including semiconductor company LSI, networking tech maker Brocade and, in 2015, the $37bn takeover of communications giant Broadcom, whose name the group then took.
Tan’s dealmaking streak ran aground in March 2018. Trump’s intervention against the Qualcomm deal, which came after the Committee on Foreign Investment in the United States raised national security concerns, put an end to what would have been the biggest technology takeover in history.
Soon after, Broadcom relocated its corporate headquarters from Singapore to California, completing a plan that had seen Tan and Trump shaking hands in the Oval Office only months earlier.
Looking back, Tan said his biggest mistake in the Qualcomm “misadventure” was going hostile. “You don’t know what you’re getting into,” he said. “The only real way to do acquisitions is to do it on a friendly, arm’s-length basis.”
Tan did not leave his bankers idling for long. By the end of 2018, Broadcom had closed a $18.9bn acquisition of CA Technologies, a software company known for its high-margin mainframe business. A year later, Broadcom paid $10.7bn for Symantec’s enterprise security business. If regulators approve its $61bn cash-and-stock takeover of VMware, which also sees Broadcom assuming $8bn of debt, it will be Tan’s biggest deal yet.
Asked how VMware — which makes “virtualisation” software for managing corporate IT systems across a complex of mix of data centre hardware and cloud computing platforms — fits with the rest of Broadcom’s portfolio, Tan said simply: “It doesn’t.”
Each of Broadcom’s 22 product divisions — which include semiconductors, networking gear and enterprise software — ran “very independently”, he said, while sharing back-office functions and some sales teams.
“They are [each] allowed to invest as much as they need to, to get to be number one or maintain their number one position” in their respective markets, Tan said. If any of those units had to rely on one of their “sister” divisions to achieve that goal, he added, “they do not deserve to exist”.
“We look at VMware as the twenty-third product division,” Tan said. “Is there an overarching strategy? The answer, I hate to say, is ‘no’. The only overarching strategy is the model that says we buy assets and we run them better.”
Despite this model being compared to private equity, Tan insisted this is the “biggest misconception” about Broadcom: “We are not consolidators, we are operators.” He bristles at analysts who accuse him of slashing costs, halting innovation and hiking prices after closing a deal.
“I am not harvesting, I am trying to grow the product,” he said, a principle he hopes will drive VMware customers to “consume more because it adds value” to them, avoiding the need to raise prices.
Tan’s expansion strategy for VMware rests on pushing it into every kind of data centre, from private corporate facilities to Big Tech’s vast cloud computing platforms. It also forms the heart of his response to the European Commission’s questions about the deal.
In December, Brussels opened an in-depth investigation, saying it had “preliminary” concerns that the company would degrade or block interoperability between VMware’s software and Broadcom’s competitors’ datacentre hardware, locking customers in to its own kit.
“The basic value proposition for VMware to exist is that you must be able to virtualise every piece of hardware that exists in a data centre,” Tan said. “The minute you start degrading, discriminating [or] deprecating pieces of hardware, you just shoot yourself in the foot.”
At the same time as trying to placate regulators, Tan is facing the threat that Apple — its largest customer, accounting for about 20 cent of sales last year — may replace the Broadcom wireless chips in its iPhones with parts the Cupertino-based company has designed in-house.
Tan said he was “confident I can out-engineer them” despite the huge success of Apple’s other chip designs. “They value technology to sell their hardware, so they will take the best technology,” he said.
Alongside Apple and most companies in the electronics supply chain, Broadcom is reassessing where it sources and manufactures its products, after two years of shortages and disruption due to Covid-19 and growing tensions between the US and China.
Beyond a very few specialised components, Broadcom outsources manufacturing of its semiconductors. Tan said he was considering Intel as a potential new foundry partner, as an alternative to its main supplier, Taiwan-based TSMC.
Broadcom was also looking at a “little bit more” insourcing, Tan said, including potentially manufacturing its own substrates. These unsophisticated but vital pieces of connective tissue inside every chip have become a choke point in the semiconductor supply chain.
“Substrates are something we used to take for granted, like water and air,” he said. “Not anymore.”
Read the full article here