Broadcom/VMware: FTC Staff Sounds Out Third Parties About Signing Declarations for Possible Court Case

Published on Feb 10, 2023

FTC staff attorneys reviewing Broadcom’s (AVGO) proposed purchase of VMware (VMW) are sounding out industry participants about whether they would sign declarations or participate in investigational hearings, deepening the agency’s investigation of the $61 billion deal, sources familiar with the matter said. 

The declarations, which are statements signed by industry participants, and statements made during the investigational hearings are admissible in court. 

The discussions between the FTC and third parties indicate that complaints about the deal by customers and other industry players are resonating with staff. By exploring third parties’ willingness to go public with criticisms made in private, staff can test the strength of any court case the FTC would bring to prohibit the transaction. 

While collecting signed declarations doesn’t definitively signal that the FTC will challenge Broadcom/VMware, it does show that a suit is under serious consideration. 

Staff is primarily investigating whether Broadcom post merger would make it more difficult for some rival components makers to design chips that operate as smoothly as Broadcom’s own products with VMware’s virtualization software. 

In addition, staff is examining what the impact would be of Broadcom cutting VMware’s research and development budget—despite the company’s publicly stating plans to increase R&D spending after the deal’s completion. Separately, the staff is also looking at whether Broadcom could force VMware to buy its chips by bundling or tying its products to VMware’s. 

But the main theory of harm revolves around whether Broadcom could restrict competing chipmakers’ access to VMware, raising those rivals’ costs. Specifically, the FTC is looking at whether the company could harm its competitors in storage adapters, network interface cards, or NICs, and fiber channel host-bus adapters, known as HBA cards. These components connect either storage systems or computers to a network. 

Under this theory, Broadcom could put rivals at a disadvantage by making it difficult for them to update their drivers, a piece of software that communicates with VMware and then instructs the chips on how to work.  

“It’s really about access to people, [product] road maps,” said Gary Chen, a research director at IDC who is not involved in the investigation. He said Broadcom could potentially “freeze out” rivals hoping to acquire the latest versions of VMware, or possibly control access to the software updates by prioritizing rivals and putting them into “tiers.” 

VMware is the market-leading producer of virtualization software, which allows large businesses to operate computer networks cost effectively by enabling one server to run multiple operating systems and applications using “virtual machines.” 

A spokesperson for Broadcom said the company had made progress in convincing regulators that the deal isn’t anticompetitive, citing antitrust clearances in Canada, Brazil and South Africa. “We will continue to engage with the FTC, as well as the other relevant regulatory authorities,” the spokesperson said. “We are confident that regulators will see this when they conclude their inquiry.” 

The merger is about offering more options to corporate customers, not fewer, the spokesperson said. 

“The combination of Broadcom and VMware is about enabling enterprises to accelerate innovation and expand choice by addressing their most complex technology challenges in this multi-cloud era,” the spokesperson said.  

An FTC spokesperson declined to comment. A VMware spokesperson didn’t respond to a request for comment. 

European Commission developments. The deal also is raising issues with enforcers across the Atlantic. Sources familiar with the matter said the deal increasingly appears to face real regulatory risk at the European Commission, which on January 24 suspended its phase 2 in-depth probe of the tie-up to get more information from the merging parties.   

The commission, which is investigating the same interoperability and foreclosure issues as the FTC, might view divestitures as more appropriate than behavioral remedies in resolving any competition concerns it has with the Broadcom/VMware combination. The sell-off of Broadcom hardware assets could be one way of addressing regulatory misgivings because the divestitures would remove the buyer’s incentive to hamper rival’s hardware products. 

The EC—like its counterparts in the U.S. and the UK—favors structural remedies over behavioral when possible. The Broadcom/VMware deal theoretically presents a vertical case in which the acquirer could divest a components business or businesses. In contrast, divestitures weren’t a viable option to resolve EC vertical concerns about Illumina’s purchase cancer-test developer Grail, and the regulator moved to block the transaction. 

Broadcom no doubt will strongly resist divestitures if the commission ultimately demands them. 

Given the early stage of the EC review, it’s unlikely the regulator and the companies are in remedy discussions.  

Meanwhile, the Competition and Markets Authority only began its phase 1 review of the deal on January 25. The UK competition watchdog is expected to open a phase 2 review of the deal by April 5. Provided the EC review suspension is short, the company will have an opportunity to argue its case and, if successful in doing so, present behavioral remedies in Brussels to address interoperability concerns before the CMA releases its provisional findings.  

Spokespeople for the EC and Broadcom declined to comment about the commission’s review. VMware didn’t respond to a request for comment on the EC review. 

In China, the State Administration for Market Regulation (SAMR) is likely to take a close look at tying and bundling issues. China-based legal practitioners not involved with the transaction estimated that the review would be lengthy because of the competition issues involved. 

Broadcom has started prenotification discussion with SAMR case handlers. 

Customer concerns. Some corporate customers are concerned about how Broadcom would manage VMware and have decided to “rein in” their future spending on the software, IDC’s Chen said. 

Most of that spending reduction, he said, is related to VMware’s relatively new Tanzu product, which transfers data between on-premises data centers and those in the cloud. Critics of the transaction have said that Broadcom would cut R&D spending on software like Tanzu, as it did with software from Symantec and CA Technologies after purchasing those companies. 

Broadcom CEO Hock Tan responded to those fears in an October 22 blog post. 

“I see Tanzu as a strategic part of the VMware software portfolio and it will remain that way as we move forward within Broadcom,” he wrote.