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Broadcom’s $61 billion VMware acquisition shows tech companies are still ready to deal

May 26, 2022, 5:21 PM UTC

A $61 billion acquisition? In this market?

Chipmaker Broadcom showed Thursday that it’s got no problem throwing around that kind of dough during a tumultuous time in tech, announcing a deal to acquire cloud-computing company VMware at a 44% premium over its value at the end of last week. (VMware shares had jumped since news of a potential purchase leaked Sunday.)

The blockbuster deal provides yet another signal that the appetite for big-dollar mergers and acquisitions will remain strong in tech—even as investors continue to cash out on companies and leveraged buyouts become more expensive owing to rising interest rates.

Despite the numerous headwinds that bludgeoned the tech sector to start 2022, including the war in Ukraine and early rumblings about a potential recession, first-quarter M&A activity remained robust. 

PitchBook data showed that the information technology sector saw about 1,400 deals worth $261.5 billion completed in the first three months of the year, the second-highest quarter since the pandemic started. 

The period also featured several lucrative acquisition announcements, including Microsoft’s record-high $68.7 billion deal to buy video game developer Activision Blizzard; the $16.5 billion sale of cloud-computing company Citrix to two private equity firms; Intel’s $5.4 billion deal for Tower Semiconductor; and Google’s $5.4 billion purchase of cybersecurity firm Mandiant. 

The Broadcom deal and April’s announcement of Elon Musk buying Twitter for $44 billion will propel the M&A market into the second quarter and beyond, as more companies become ripe for the picking.

While the cost of debt-financed acquisitions continues to jump, cash-flush companies like Amazon, Alphabet, Apple, and Microsoft could use the market downturn to buy smaller players at discount prices. As one equities researcher told the New York Times last week: “Big tech can say, ‘Forget the economy,’” and continue to “invest through the cycle.”

In addition, multiple industries are undergoing rapid consolidation, with few signs that the recent market downturn will halt the trend. The VMware deal, for example, marks one of several recent acquisitions in the software sector, which has plenty of room to consolidate.

“I think, more and more, the boards of directors have to take the offers of acquisition seriously from private equity,” RBC Capital analyst Rishi Jaluria told CNBC last week. “And at the same time, I think some of your larger platform players—your Salesforce, Microsoft, Oracle, and SAP of the world—are looking at some of these multiples coming down so much and saying this is a great time to start to consolidate some IT spend and really take advantage of the major pullback we’re seeing here.”

The video game market also continues to draw intense M&A interest following Microsoft’s stunning offer for Activision Blizzard, with Puck News reporting last week that Electronic Arts is searching for a buyer. Same goes for the semiconductor sector, where the promise of intense growth over the next decade is driving expensive acquisitions by established players. Expect more food delivery deals, too, as the intensely competitive landscape thins out and lavish venture capital money dries up. 

Then there’s the crypto and Web3 realm, which saw a boom in mergers and acquisitions last year as blockchain entrepreneurs tried to scale their products amid fierce competition.

“For the blockbuster to emerge, it takes concentration,” Filip Dames, a founding partner at the venture capital firm Cherry Ventures, told Insider. “We’re seeing this already. Big guys seem to emerge as the winners that have traction, that have product-market fit.”

When the dust settles on 2022, the merger tally probably won’t match last year’s blowout. Markets move more cautiously in periods of uncertainty. Acquisitions of unprofitable companies aren’t as appetizing right now. Domestic and international antitrust regulators are scrutinizing Big Tech mergers more closely.

Still, there are deals to be had. Even at $61 billion.

Want to send thoughts or suggestions for Data Sheet? Drop me a line here.

Jacob Carpenter

NEWSWORTHY

Rolling it back. Apple plans to keep iPhone production levels roughly flat in 2022 as global economic conditions diminish demand and supply-chain issues hamper manufacturing, Bloomberg reported Thursday, citing sources familiar with the matter. Apple now expects to produce about 220 million iPhones this year, about 20 million fewer than market analysts had forecast for 2022. The pullback follows a rare dip in global smartphone shipments to start the year, as well as COVID-related shutdowns impacting key Apple manufacturing contractors in China.

The cost of privacy. Twitter agreed Wednesday to pay $150 million to settle a case brought by the Federal Trade Commission and Justice Department, which alleged that the social media company deceptively deployed user data for targeted advertising, the Washington Post reported. Federal regulators said Twitter failed to notify users who provided email addresses and cell phone numbers that the information would be provided to data brokers, facilitating the sale of targeted ads between 2014 and 2019. Twitter will be required to notify affected users of the since-discontinued practice as part of the settlement.

He’s got it covered. Elon Musk disclosed changes to his plan for financing a $44 billion purchase of Twitter, notifying federal regulators that he will offer an additional $6.25 billion in equity and drop plans to obtain a margin loan secured by his Tesla stock. The shift brings the equity component of Musk’s financing to $33.5 billion, eliminating the need for a margin loan that weighed on Tesla shares in recent weeks. Tesla stock rose 6% in midday trading Thursday, while Twitter shares jumped 5%.

Chips and dip? Nvidia became the latest company Thursday to announce plans to cut costs and slow hiring, with the semiconductor producer citing a challenging economic landscape and costly disruptions in Asia, CNBC reported. The commitments followed a strong first quarter for Nvidia, which beat analyst estimates by posting $8.29 billion in revenue and earnings per share of $1.36. Nvidia shares rallied Thursday afternoon, trading up 3%, after initially sinking after the opening bell.

FOOD FOR THOUGHT

Reckoning with Kwon. There’s no bigger crypto villain right now than Do Kwon. The founder of Terraform Labs oversaw the devastating collapse of two cryptocurrencies he pioneered, wiping away $60 billion in investors’ money. So is the enigmatic Kwon a shameless scam artist peddling an obvious Ponzi scheme? Or is he merely an ambitious crypto champion beset by the fickle whims of an immature market? Fortune’s Taylor Locke took a stab Wednesday at decoding the mystery of Kwon, finding a mix of angry investors and unlikely admirers surrounding the most hated man in crypto.

From the article:

Kwon is either seen as a complete “psychopath”—or a genuinely “good” person. Outsiders see Kwon as a “trash-talker” who created a “Ponzi scheme” and delights in calling his critics “poor,” while his inner circle says he’s a misunderstood “genius.” (Kwon has defended himself on Twitter, denying many of the claims—including accusations of a Ponzi—while declining to comment to the media, including Fortune.)

Ronald AngSiy, vice president at decentralized finance (DeFi) company Intellabridge Technology, tells Fortune that he lost over $1 million investing in UST and Luna. But how does he view Kwon now? “A brilliant person and a great human being,” he says.

IN CASE YOU MISSED IT

Apple is hiking hourly pay for retail employees to $22 an hour. Corporate workers are getting a boost, too, by Nicholas Gordon

“We got shafted”: Bolt employees vent frustrations after $11 billion tech startup axes jobs, by Sophie Mellor

China’s military researchers are thinking of ways to take down Elon Musk’s Starlink network, by Eamon Barrett

Despite some recent turbulence, Coinbase achieves a major milestone, by Declan Harty 

Bitcoin has lost all of its gains (and much more) since Joe Biden took office, but other cryptos have thrived, by Chris Morris

Europe’s top banker Christine Lagarde says her son invested in crypto—even though she thinks it’s worthless, by Taylor Locke

RadioShack returns—as a cryptocurrency swap platform, by Chris Morris

BEFORE YOU GO

Some soul searching. Ethereum’s founder wants to take your drawer of treasured private possessions and put it on the blockchain (or something kind of like that). As Fortune’s Eamon Barrett wrote Thursday, cryptocurrency trailblazer Vitalik Buterin recently outlined a vision for creating non-tradable assetslike your college degree, employment history records, or old writingsthat are stored in a private blockchain wallet. His slightly ominous name for these digital items: “soulbound tokens,” or SBTs. Buterin makes a few practical arguments for this creation. Wouldn’t it be nice, he argues, if a high school provided diplomas via SBT format, allowing owners to easily access and provide proof of graduation. By the same token, what if an authoritarian regime could peer into your blockchain soul? For now, I’m sticking to the old lock and key.

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