Serpentine coils are slowly throttling Broadcom’s proposed $61 billion acquisition of VMware over the weekend after the UK Competition and Markets Authority (CMA) imposed an extremely short deadline in which Broadcom must now satisfy all regulatory objections to the merger if the company meets its self-imposed decision time limit. The set purchase deadline is to be completed on October 30 this year.
The saga started almost 11 months ago, on May 26, 2022, and since then, concerns and objections regarding the acquisition have been increasing. Last Friday, the CMA released an update on its investigation into the deal and imposed a strict deadline calling all interested parties to submit to the regulator. The May 9 deadline is just two working days away, during which the UK will make national holiday allowances to celebrate King Charles III’s coronation.
The CMA update added that it would hold preliminary hearings on submissions in early June and further hearings on necessary remedies in July and August. The final report will be completed and published by the end of August (when most of Europe is on summer vacation).
Even if everything goes swimmingly, which is possible but unlikely, this is a strict schedule. However, if (as is likely) the CMA is unsatisfied with Broadcom’s responses, any outstanding issues will be thorny and must be resolved between early September and late October. If the regulatory requirements aren’t finalized by Broadcom’s days-before-Halloween deadline, markets could react badly, and the whole deal could flounder and fail.
Broadcom, the software and semiconductor maker, wants to buy cloud computing and visualization software company VMware to branch out and diversify into enterprise software. From the beginning, the UK authorities, embodied in the CMA, were concerned that the deal would slow innovation, reduce competition and increase the already accelerating costs of server software and computer components.
UK regulators are concerned about increasing competition.
Broadcom Inc. of VMware. In its new ‘Issue Statement’ dated April 21 on ‘anticipated acquisition by’, the CMA has made things simple. It wrote that “in the exercise of its duty”, it must determine “whether the creation of those relevant merger circumstances would result in a substantial lessening of competition (SLC) in any market or within markets in the United Kingdom (UK) Goods or services.”
As well as being subject to ongoing review by other competition authorities, the merger is also being reviewed by the US government, the European Union, and China.
As part of assessing a merger’s competitive effects, the “harm theory” concept is considered, which “describes the potential ways in which a merger may reduce competition significantly.”
In its earlier “Phase 1 Decision,” the regulator found that the proposed merger did “create a realistic possibility of an SLC resulting in the foreclosure of hardware competitors by leveraging VMware’s position in server virtualization software and non-horizontal effects.” The exchange of commercially sensitive information- providing.”
On that basis, the CMA launched an in-depth Phase 2 investigation which “does not preclude us from identifying an SLC on a different basis after further work, or upon our receipt of additional evidence.” The regulator added that it would “check the foreclosure of hardware competitors by taking advantage of VMware’s position in server virtualization software,” noting that “under certain circumstances, non-horizontal mergers may weaken competition, for example, when they result in the foreclosure of the merger. Firm’s competitors. It faces the merged entity. Would weaken the restrictions and consequently harm competition and therefore consumers.”
When assessing a foreclosure theory of damages, the CMA determines that three cumulative conditions are satisfied, namely:
1) Capability. “Will the merged entity have the ability to use its control of inputs to harm the competition of its downstream rivals?”
2) Incentives. “Will it have the incentive to do it, i.e. will it be profitable?”
3) Effect: “Would the foreclosure of these competitors substantially reduce overall competition?”
In the case of Broadcom/VMware, the spotlight is on whether combining the two companies into a single entity would allow the presence and power in a market to hit rival companies in a vertically related market. And CMA thinks this acquisition will do just that.
The United Kingdom is not alone in raising questions about the proposed deal. The European Union, through the powerful European Commission (EC), told Broadcom that it believed the acquisition would prevent competition in the sector from being able to interoperate with VMware software and that it would thoroughly investigate the merger.
When the deal was announced, VMware customers immediately expressed concern for the future, citing Broadcom’s less successful CA Technologies and Symantec acquisitions. The company raised prices, stopped R&D investment, and reduced customer support when they were completed.
So, the Broadcom-VMware merger isn’t a done deal by any means. Regulators, and the company’s competitors and customers, are worried and time-pressed. Should the deal’s deadline be missed, VMware will likely be left alone at the altar to pick up the pieces.
