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Broadcom-VMware merger probe to enter deeper second stage

Competition regulators in Britain opt for Phase II discovery over worries about prices and rival tech access

UK government will proceed with an in-depth investigation into the proposed buyout of VMware by Broadcom, dashing the companies' hopes the merger might be waved through quickly by regulatory bodies.

The Competition and Markets Authority (CMA) is pressing ahead with a Phase 2 investigation into Broadcom's pending $61 billion takeover of cloud and virtualization company, after Broadcom declined to offer any undertakings in response to merger concerns.

The two companies disclosed the move last May, and the UK's CMA opened its preliminary probe into the planned acquisition in November. This Phase 1 investigation raised concerns just last week that the merger could lead to higher prices and damage potential innovation in the server market.

This was based on the CMA's notion that post-merger, Broadcom might be able to use VMware's dominant position in server virtualization to restrict compatibility with its platform to servers using Broadcom's silicon components. Such components include Ethernet and Fibre Channel network adapters and switches.

VMware customers expressed different fears: that Broadcom may hike the cost of licenses in order to drive profits, and slow development of updates and technical enhancements for products.

Broadcom was given five working days from the date of the CMA's decision on March 22 to offer solutions to address the regulator's concerns. The CMA said today: "Broadcom informed the CMA that it would not offer such undertakings to the CMA."

Management at the chipmaker should pay attention: the CMA previously killed off Meta's proposed purchase of Giphy because Meta refused to make sufficient concessions.

The CMA has now set a statutory deadline for its decision of 12 September 2023, and said its administrative timetable will be published as soon as practical.

This move will come as a blow to Broadcom and VMware, which had set a date by which the merger was supposed to be concluded of May 26, and Broadcom has repeatedly said it expects to close the transaction within its current financial year, which ends on October 30.

In the same statement sent to us last week, VMware said: "Broadcom's acquisition of VMware continues to move forward as expected, including with respect to the regulatory review process taking place in the UK and those across multiple other jurisdictions. VMware will continue to respond to all regulatory inquiries, as appropriate, and we continue to expect the deal to close in Broadcom’s fiscal year 2023."

Meanwhile, a Broadcom spokesperson repeated that the company is working constructively with the CMA as it continues its standard merger review process, and it also continues to expect the transaction to close in Broadcom’s fiscal year 2023.

"We will address the concerns raised and demonstrate that the transaction enhances competition and benefits businesses and consumers through increased quality, innovation and choice," the spokesperson said.

Broadcom claimed it is making progress with regulatory filings around the world, having received legal merger clearance in Australia, Brazil, South Africa, and Canada, and foreign investment control clearance in the UK, Germany, France, Austria, Denmark, Italy, and New Zealand.

The European Commission announced its own in-depth investigation into Broadcom's buy of VMware in December, citing similar reasons to the UK CMA; that the merger would allow Broadcom to restrict competition in the market for certain hardware components which interoperate with VMware's software.

In the US, the Federal Trade Commission is also looking into the deal, but has yet to disclose a timeline for its decision. Reports last month suggested that FTC staff were having detailed discussions with industry participants over worries about the merger.

Alex Haffner, Commercial and Regulatory partner at UK law firm Fladgate, said the CMA decision is likely to be watched carefully by other regulators.

"The decision, which is that unless the parties can come up with sufficient remedies to alleviate the CMA's concerns the transaction should be referred for a detailed Phase 2 investigation, is notable because it is based on theories of harm that involve the merging parties leveraging market power in one market (server operability) to harm competitors in a vertically related market (components)," Haffner said.

If the CMA can make these theories of harm stick, "it is likely the parties will need to be creative to come up with remedies to assuage the CMA's concerns," he added. ®

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