Broadcom's $61 billion VMware deal faces deep EU probe

Broadcom's proposed $61 billion acquisition of cloud computing company VMware will face prolonged scrutiny in the European Union after regulators warned that the deal would lead to high prices, low quality and little innovation for enterprise customers, newspaper reports said.

Competition Commissioner Margrethe Vestager said on Tuesday the preliminary investigation highlighted the risk that Broadcom could prevent its hardware rivals from interoperating with VMware's server virtualization software after the merger. The EU, which has set a May 11 deadline to review the deal, said the decision to launch an in-depth investigation did not prejudge its outcome.

Broadcom formally sought EU approval for the deal last month after months of preliminary discussions with the European Commission's takeover team. The deal marks the semiconductor maker's largest-ever acquisition and continues a buying spree by Broadcom Chief Executive Hock Tan, whose support for Broadcom's software products by VMware has been a key part of his strategy in recent years.

On the other hand, the deal could also be investigated by British regulators in addition to the EU. Britain's Competition and Markets Authority (CMA) last month invited all parties to comment on the case, saying it wanted to know whether the takeover would significantly reduce competition in the UK market.

Given the scale of the deal, an in-depth EU investigation was expected, market analysts said. Product overlap shouldn't be an issue, the analyst said. The concern for small businesses is that the stickiness of VMware's virtual server offerings could give it price leverage over customers, with VMware's 79% market share in 2021, but VMware Price guarantees can be offered to alleviate such concerns.

Broadcom has stated in a statement that the acquisition of VMware has been approved in Brazil, South Africa and Canada, and is progressing elsewhere in the world. It is estimated that the transaction will be completed in the 2023 fiscal year.

Broadcom's series of acquisitions has drawn opposition from competitors, who are worried that Broadcom's continuous expansion of its business scope will affect competition. At the same time, it has also sparked an intense lobbying campaign aimed at preventing Broadcom from expanding further and investigating the acquisition, as well as penalizing its product sales strategy.

The Broadcom acquisition is the second major tech deal to come under scrutiny by EU antitrust authorities, following Microsoft's (MSFT-US) $69 billion takeover of game developer Activision Blizzard (ATVI-US ), which is under investigation. Regulators have previously expressed concern that a merger between the two companies could thwart the development of popular games such as Call of Duty.

Before the deadline, Broadcom (AVGO-US) intraday stock price fell 1.31%, tentatively reported at $542.44 per share.