When Broadcom's acquisition of VMware closed at the end of November, we learned that it was going to seek "strategic alternatives" for VMware end-user computing.
In Broadcom's fourth-quarter earnings call last week, CEO Hock Tan put a bit more wood behind the arrow on his plans, confirming that Broadcom officially intends to divest itself of end-user computing (EUC). This was followed by a blog from Shankar Iyer, senior vice president and general manager of Broadcom's end-user computing division, which highlighted the following points:
- It sees its EUC business as strong.
- It plans on investing more in R&D and putting emphasis on customer support.
- It will increase focus on partner programs and resources.
Essentially, these are the things that a company that was just put up for sale should say. In particular, research and development, support and partner programs are important callouts both because they needed some attention and because customers and partners are sure to be concerned about what the future holds. VMware EUC is a key component of the strategic VMware platform that it has invested in over the years, and extricating it into its own entity will be a challenge.
In fact, this brings up two trains of thought for me: How will this work from a product and technology perspective, and what are the likely outcomes of a divestiture?
Let's have a look.
Product and technology
VMware EUC leverages integrations up and down the VMware stack, most notably with VMwareHorizon, which has rather famously only worked with VMware's vSphere hypervisor. While you might think that will make it difficult to parse out Horizon, the reality is that much has been done in the last five years to make Horizon work without vSphere, like decoupling Blast from the hypervisor. Today, both Horizon Cloud on Microsoft Azure and Horizon 8 on Amazon WorkSpaces Core run natively in their respective clouds without any vSphere, while still using Blast, App Volumes and the rest of the Horizon features.
That's not to say that divesting the tech will be a snap, especially since there are many features in Horizon 8 that integrate with vCenter and vSphere that would have to be replicated if Horizon were to work on other platforms, but it's not the impossibility that it once seemed to be.
One of the main challenges, however, will be licensing. Many of the Horizon customers that run their workloads on vSphere rely on the vSphere Desktop license that's included with their Horizon license. From the customer perspective, this was an easy transaction that avoided the more complex per-CPU/per-core licensing associated with other vSphere workloads. (Not all customer used this, since some had enterprise agreements in place, but that's a whole other kettle of fish.)
How VMware handles that under Broadcom will be interesting. Customers aren't going to like the idea of paying for vSphere licenses for all the cores they have dedicated to their virtual desktops. They're also going to frown on paying the same price for a Horizon license that no longer comes with vSphere. And again, that's leaving out all the enterprise agreements, channel partners and managed service providers.
With regard to enterprise agreements, the same holds true for Workspace One. Just how will VMware carve those products out of existing enterprise agreements, and how much will the new costs change when customers have to start paying for each thing separately?
Ultimately, while the news from Broadcom's earnings call and the blog amounts to a bit more clarity on the plans for VMware EUC, everything is still in a holding pattern. It does, however, seem like Broadcom is eager to move on.
Before I move on, I want to point out that I am speculating on what might happen. I'm not trying to generate fear, uncertainty and doubt -- I know there are lots of jobs and customers hanging in the balance of whatever happens. These are always tough times, but it's useful to think this through.
Where might these business units land?
Divesting can mean many things, but most often in these situations it means liquidation, an outright sale or a spinoff. Liquidation doesn't seem likely. VMware EUC, which includes Horizon, Workspace One and App Volumes, simply pulls in too much revenue to snuff out (in addition to being strong brands). Of the remaining options, an outright sale seems most likely.
On the earnings call, Broadcom estimated 2024 revenue for VMware EUC and Carbon Black would be $2 billion. I don't know Carbon Black's business well enough to speculate there, so let's focus on EUC, which I expect is the lion's share of that $2 billion in revenue. Even if it was split 50/50, the potential acquirer would need to come up with multiple billions to purchase EUC.
Typically, SaaS companies are valued at 10 times annual recurring revenue, but VMware EUC isn't 100% SaaS, so the number will likely be lower than that. Since non-SaaS companies are typically in the 2-3 times range, let's split the difference and say the multiplier for VMware EUC is 6 times. If EUC was $1.5 billion, that means a buyer will have to come up with $9 billion. This is a little more than half of what Citrix was bought for in 2022, which, considering the larger pool of customers, seems about right.
Who would spend that kind of money to acquire VMware EUC? It's easy to throw out names like Google or AWS, but if they wanted to be all-in on hybrid desktop virtualization, app management or unified endpoint management, they'd have done it by now. Plus, it would negatively affect the partnerships they have with other companies that drive a lot of cloud consumption revenue for them. It just seems like a nonstarter.
Microsoft isn't likely, either, mainly because a huge portion of VMware EUC outright conflicts or competes with Microsoft's own offerings in a way that would be very difficult to integrate. And that's not even considering how it would get a return on its investment compared to what it can get by simply continuing to innovate and compete while the dust settles at VMware.
Note: For more on how Microsoft has found itself in the driver's seat in desktop virtualization, see my post Analyzing the chaos in the desktop virtualization market.
There's another key element of VMware EUC that could factor into this: Though they're often thought of -- and even sold -- together, there is very little integration between Workspace One and Horizon. It would add complexity to any transaction, but it's not outside the realm of possibility to think that a buyer might be interested in one or the other, but not both.
With all this in mind, it seems the elephant in the room is private equity, which is a situation that's familiar to anyone who has been tracking this space for a while. The typical private equity transaction involves significant cutbacks in personnel and a simplification of the product and services portfolio to streamline operations and increase profitability. This is what happened to Citrix when it was sold to Evergreen Coast Capital and Vista Equity Partners before being merged with TIBCO under the Cloud Software Group umbrella. This type of acquisition is hard to watch, but frankly, if Broadcom intended to keep VMware EUC, it would have likely followed a similar playbook.
The other remaining possibility is a spinoff, whereby a new corporate entity is created with shares owned (initially) by the same shareholders of Broadcom. This would indicate that Broadcom and its board see a future in VMware EUC -- just not one that aligns with the core Broadcom objectives.
This just doesn't seem likely to me, but it's possible that this becomes a more reasonable outcome if Broadcom thinks prospective private equity buyers are undervaluing VMware EUC.
Though I wish I had more clarity, we're still in the phase where dust is being stirred up instead of being allowed to settle. It's hard to say "carry on as usual," but it's also hard to solve problems or deal with situations that don't yet exist. Still, as the common saying goes, "an ounce of preparation is worth a pound of cure," so these are all things that are at least worth being aware of. I'll continue to weigh in as things develop.
Gabe Knuth is the senior end user computing analyst for TechTarget's Enterprise Strategy Group. He writes publicly for TechTarget in addition to his analyst work. If you'd like to reach out, see his profile on LinkedIn or send an email to [email protected].
Enterprise Strategy Group is a division of TechTarget. Its analysts have business relationships with technology vendors.