Chipmaker Broadcom’s planned $61 billion acquisition of VMware would allow it to undermine the ability of rival hardware providers to work effectively with the software virtualisation company’s products – and potentially give it access to the commercially sensitive intellectual property of Broadcom’s competitors.
That’s according to the UK’s Competition and Markets Authority (CMA). The markets watchdog also warned that the deal could result in higher network interface card (NIC) and storage adapter prices.
“The CMA took into account evidence that, if faced with interoperability issues using non-Broadcom hardware components in their servers, most VMware customers would find it easier to switch to using Broadcom hardware rather than to switch from using VMware to its rivals,” the CMA said on March 22.
“Maintaining effective interoperability of their hardware with widely-used software like VMware takes time and effort by hardware manufacturers. VMware’s virtualisation software interoperates with Ethernet NICs, FC HBAs, and storage adapters through device drivers that are certified by VMware and with FC switches and TOR switching chips via application programming interfaces (APIs). The CMA considered that the Merged Entity would be able to leverage VMware’s market power in server virtualisation software to weaken Broadcom’s hardware competitors, for example by impairing the certification of competitors’ drivers for Ethernet NICs, FC HBAs, and storage adapters, and impairing access to VMware’s API for competitors’ FC switches" it added in its report [pdf].
Broadcom VMware buyout: Firms given five days to address concerns
It will refer the deal to a deeper “phase two” investigation unless the parties “offer an acceptable undertaking to address these competition concerns” within five days. The CMA appears to have become more forceful in recent years, in 2021 for example giving notably short shrift to the undertakings pledged by NVIDIA prior to its abandonment of a planned acquisition of Arm, revealing that NVIDIA had promised to preserve Arm’s open licensing regime for just five years and saying acerbically that “a five-year commitment falls manifestly short of the time period required to remedy the concerns identified… which pertain to long development cycles.”
"We are concerned this deal could allow Broadcom to cut out competitors from the supply of hardware components to the server market and lead to less innovation at a time when most firms want fast, responsive, and affordable IT systems," David Stewart, Executive Director at the CMA, added in a release.
The certification process by which VMware certifies the interoperability of server products with its virtualisation software also gives it access to “product samples, product roadmaps, driver source code, and other technical information” that could, post-merger, “could harm competition in two ways” the CMA claimed.
“First, Broadcom may have a reduced incentive to innovate and compete because it could develop its products to be only marginally better than its competitors’ products. Second, Broadcom’s competitors may have a reduced incentive to innovate because they would anticipate that Broadcom would use their [commercially sensitive information] to advance its own product improvements… the effect on competition could be substantial given that the relevant hardware markets are already relatively concentrated and interoperability with VMware’s server virtualisation software is very important to server hardware manufacturers.”
Broadcom responded: “We are working constructively with the CMA as it continues its standard merger review process and are confident we will address any concerns. We will demonstrate that the transaction enhances competition and benefits businesses and consumers through increased quality, innovation and choice.
"We are making progress with our various regulatory filings around the world, having received legal merger clearance in Australia, Brazil, South Africa, and Canada. We are also pleased to have received, last week, foreign investment control clearance in the UK under the National Security and Investment Act."
Broadcom reported strong Q1 earnings earlier this month, with revenue up 16% year-over-year to $8.9 billion and net income of $3.7 billion, including on demand from hyperscalers and others building out generative AI language models which require huge ethernet networks that help piece together the racks of CPUs and GPUs doing the compute work on these large language models. Executives said on that March 2 call that they continue to expect the VMware transaction to close within its fiscal 2023 despite anticipating “that the timeline for the review process will be extended in… key regions, given the size of this transaction.”