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Broadcom (AVGO) Rumored to be in Talks to Acquire VMware

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Broadcom (AVGO - Free Report) is rumored to be in talks to acquire VMware (VMW - Free Report) for a whopping $60 billion, which would make it one of the biggest takeover deals of the year.

Per The Wall Street Journal, the two technology companies are expected to seal the deal in a cash and stock deal worth about $140 a share. To finance the deal, Broadcom is expected to raise a debt of roughly $40 billion from a handful of banks.

The news positively impacted VMware as shares jumped 25% to close at $119.49 on May 24. This surge in share price took the market valuation of the company to more than $50 billion. In the year-to-date period, the stock has returned 3.1% against the Zacks Computer - Software industry’s decline of 27%.

However, shares of Broadcom, which currently carries a Zacks Rank #3 (Hold), fell roughly 3% to $526.36, taking its market value to $215 billion. In the year-to-date period, the stock fell 20.9% compared with the Zacks Electronics - Semiconductors decline of 23%. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

Broadcom’s VMware Acquisition to Help Diversify Portfolio

Broadcom is a premier designer, developer and global supplier of a broad range of semiconductor devices with a focus on complex digital and mixed-signal complementary metal-oxide semiconductor (CMOS)-based devices and analog III-V-based products. As such, the company has been benefiting from the rising demand for semiconductors globally.

However, Broadcom CEO Hock Tan believes that the current boom in the semiconductor industry will halt and decelerate to historical growth rates of about 5%. Rising supply chain constraints and geopolitical tensions are expected to increase operating expenses, thus decreasing net profit. As such, the company has been strengthening its presence in the corporate software market to improve top-line growth as demand for cloud computing increases.

Cloud computing enables customers to rent public and private spaces to store data rather than investing in building their own space, which is a costly affair. The earliest adopters of cloud computing were startups and companies that could not support building in-house IT departments, but now companies across every industry use cloud computing technology to reduce operating costs.

VMware is a pioneer in virtualization software that consolidates applications and programs on a smaller number of servers and will help Broadcom to tap the hybrid cloud market.

Broadcom is diversifying its portfolio through acquisitions like other technology giants Microsoft (MSFT - Free Report) .

Microsoft announced the buyout of Activision Blizzard in January for roughly $75 billion, making it the biggest takeover of this year so far to increase market share in the gaming industry, which is widely dominated by Sony.

Another probable big deal in the year 2022 is the acquisition of Twitter (TWTR - Free Report) by Elon Musk for $44 billion.

Elon Musk has shown interest in taking Twitter private to tap the full potential of the company in practicing free speech. It is worth mentioning that Twitter has less stringent content policies than its other social media rivals and is the first among its peers to support NFT trading, which is expected to diversify the company’s revenue generation capabilities.

However, the volume of mergers and acquisitions has gone down overall by 31% since the year-ago period as global market volatility has paused several deals. IPO activity has almost come to a standstill as would-be-public companies wait for decrease in volatility.

However, as the broader Zacks Computer and Technology sector has fallen 28.6% in the year-to-date period, the market cap has declined, making mergers and acquisitions more affordable.

Per Bloomberg, VMware shareholders will benefit from the stock portion of the deal as the recent acquisitions are expected to boost earnings by 5% to 10%.

As such, all eyes will be on VMware earnings release on May 26 to find out whether the rumors of the third-largest acquisition deal are more than speculation.

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