Broadcom will let VMware shop for another buyer, but is any other software company interested?

On Thursday, shares of VMware VMW, +3.17% rose 3% but still closed nearly 13% below Broadcom’s AVGO, +3.58% price of $142.50 a share. VMware shareholders will have the option of receiving $142.50 in cash per share, or 0.2520 Broadcom shares for every VMware share, an option that may be preferred by longtime investors such as Dell Technologies DELL, +1.45% founder Michael Dell, who owns about 40% of VMware, for income-tax purposes.

The deal has been signed off on by the boards of both companies, while pending a final shareholder vote. Founded by entrepreneur Diane Greene, her husband Mel Rosenblum and three others in 1998, VMware was one of the pioneers of the concept of virtualization, which lets different operating systems run on the same hardware, simultaneously, as if they were all running on their own machine.

In the pre-cloud era, VMware was one of the hottest stocks in software, as it was a key piece of infrastructure for many companies. But today, the bulk of its business still is on-premises data-center software. It has been transitioning to more revenue coming from the cloud, or software-as-a-service, but Bernstein Research analyst Mark Moerdler noted that in fiscal 2022, about 25% of revenue was expected to come from subscriptions. He also noted in a report earlier this year that VMware’s stock took an “unfair hit” when it was spun off from Dell in November.

An acquisition by Broadcom is not exactly a big endorsement of VMware’s cloud-based future. The addition of VMware to Broadcom’s software offerings, the company said in a regulatory filing, would “provide enterprise customers with an expanded platform of critical infrastructure solutions to help accelerate innovation and address the most complex information technology infrastructure needs.”

Broadcom has made it a practice of buying older, forgotten software companies and using private-equity tactics to clean them up and make them more efficient. Broadcom’s first foray into software was in 2018 to buy CA Inc., best known for its mainframe software.

From 2018: Read more about Broadcom CEO Hock Tan’s acquisition of CA Inc.

Cowen & Co. analyst Matthew Ramsay, though, believes the deal would be a major coup for Broadcom. “VMware’s hybrid cloud infrastructure software is foundational to an extremely wide customer base, deepening Broadcom’s hooks and providing opportunity to leverage its sales force to cross-sell its other software portfolios,” he wrote in a note. “VMware’s software is both critical and sticky — fitting with Broadcom’s software M&A targets, just on a broader and larger scale.”

But other software companies might be a better fit for VMware, and VMware has 40 days to shop itself to find a better offer. The point of having the so-called go-shop provision, said one investment banker who was not involved in the deal, is to give the seller the opportunity to find another buyer, and a break-up fee would apply if indeed VMware were to find another buyer. This tactic is most often used in private-equity deals, and one could argue that Broadcom is becoming a combination tech conglomerate/private-equity firm.

“We think other infrastructure software companies and/or companies with cloud platform ambitions could be interested in acquiring VMW,” Bernstein’s Moerdler wrote earlier Thursday, listing a few companies that would be viable candidates . “Potential buyers (other than private equity) are likely limited to very large enterprise software companies (e.g. Cisco CSCO, +2.25% — not covered) or a large hyperscale cloud provider such as Microsoft MSFT, +1.29%, Amazon AMZN, +4.03% or Google GOOG, +2.32% GOOGL, +1.88% or an aspiring hyperscale cloud provider such as Oracle ORCL, +2.62%. ” Some might also remember that VMware co-founder Greene spent three years as CEO of Google Cloud, and seven years on Alphabet’s board of directors.

Moerdler added that Microsoft may have too many overlapping solutions and could face regulatory hurdles, and that Oracle, which might see even greater benefit than the others, would be unlikely to buy given the price and its own recent deal to buy Cerner Corp. CERN, -0.04% for $28.3 billion.

Given VMware’s Silicon Valley creds and its former status as a once-hot company, it will be interesting to see if it actually does try to shop itself and come up with a better mate. Ironically, in a Q&A in a recent Securities and Exchange Commission filing, the companies posed a question: “Q. Broadcom has a very different corporate culture than VMware, and their management team seems to be more like financial engineers than operators. Why would I sign up for that type of culture?”

VMware and Broadcom said they plan to work together to nurture a culture that inspires and engages their communities.

But it’s feasible that this latest Silicon Valley saga has not reached its finale.