• UK Competition and Markets Authority starts an in-depth Phase 2 investigation
• European Union likely to do the same, as is the US – while China’s decision is pending
• UK regulator imposes stringent and very tight deadlines for resolution to issues surrounding the merger
• If Broadcom’s self-imposed deal completion date of 30 October is missed, the acquisition could fail, with profound ramifications for both companies

The serpentine coils that are slowly throttling Broadcom’s proposed $61bn acquisition of VMware tightened further over the weekend after the UK Competition and Markets Authority (CMA) imposed an extremely short period within which Broadcom must now satisfy all regulatory objections to the merger if the company’s self-imposed purchase deadline of 30 October this year is to be met.

The saga began almost 11 months ago on 26 May 2022 and, since then, concerns about and objections to the acquisition have been growing. Last Friday, the CMA published an update on its probe into the deal and imposed a very tight deadline calling all interested parties to make submissions to the regulator. The deadline of 9 May is just two working weeks away, during which allowance is made for the national holiday that the UK will take to celebrate the crowning of King Charles III.

The CMA update added that preliminary hearings on the submissions will be held in early June, further hearings to codify any necessary remedies will then take place in July and August, and the final report will be completed and published by late August (when most of Europe is on summer holiday). 

Even if everything goes swimmingly, which is possible but unlikely, that’s a very tough timetable to meet. However, if (as may well be the case) the CMA is unhappy with Broadcom’s responses, any outstanding problems would be thorny ones that will have to be resolved between the start of September and the end of October. If the regulatory requirements are not concluded by Broadcom's own day-before-Halloween deadline, the markets might react badly and the whole deal could flounder and fail.

Broadcom, the software and semiconductor manufacturer, wants to buy the cloud computing and virtualisation software company VMware, ostensibly to branch out and diversify into enterprise software. From the outset, the UK authorities, as embodied in the CMA, have been worried that the deal would slow innovation, reduce competition and push up the already accelerating costs of server software and computer components.

UK regulator increasingly concerned about stifled competition

In its new ‘Issues Statement’ of 21 April on the ‘anticipated acquisition by Broadcom Inc. of VMware’, the CMA made matters plain. It wrote that “in exercise of its duty”, it must determine “whether the creation of that relevant merger situation may be expected to result in a substantial lessening of competition (SLC) within any market or markets in the United Kingdom (UK) for goods or services.” It added that the merger is “subject to ongoing review by other competition authorities including in the United States, the European Union, and China”.

The ‘Assessment of the Competitive Effects of the Merger’ is based substantially, but not exclusively, on the concept of the “theory of harm”, which “describes the possible ways in which a substantial lessening of competition could arise as a result of a merger.” In its earlier “Phase 1 decision”, the regulator found that the proposed merger did indeed give “rise to a realistic prospect of an SLC as a result of foreclosure of hardware competitors through leveraging VMware’s position in server virtualisation software and non-horizontal effects from commercially sensitive information sharing.”

On that basis, the CMA launched an in-depth Phase 2 investigation that “does not preclude an SLC being identified on another basis following further work, or our receipt of additional evidence.” The regulator added that it will also examine the “foreclosure of hardware competitors through leveraging VMware’s position in server virtualisation software,” pointing out that “in certain circumstances, non-horizontal mergers can weaken rivalry, for example when they result in foreclosure of the merged firm’s competitors. This would weaken the constraints that the merged entity faces and, as a result, harm competition and therefore customers.”

In assessing a foreclosure theory of harm, the CMA determined if three cumulative conditions are satisfied, that is to say: 1) Ability. “Would the merged entity have the ability to use its control of inputs to harm the competitiveness of its downstream rivals?” 2) Incentive. “Would it have the incentive to actually do so, i.e. would it be profitable?” 3) Effect: “Would the foreclosure of these rivals substantially lessen overall competition?”

In the Broadcom/VMware case, the spotlight is on whether the combination of the two companies into a single entity would permit the presence and power it has in one market to hurt rival companies in a vertically related market. And it seems the CMA thinks that this is exactly what the acquisition would do.

The UK is not alone in looking askance at the proposed deal. The European Union, via the powerful European Commission (EC), has told Broadcom that it believes the acquisition will throttle competition in the sector providing vital components that are able to interoperate with VMware software, and that it will mount a full investigation into the merger. When the deal was announced, VMware customers immediately voiced concerns for the future, citing Broadcom’s earlier, less-than-successful acquisitions of CA Technologies and Symantec. When they were complete, the company not only increased prices but stopped R&D investment and decreased customer support.

So, the Broadcom-VMware merger is by no means a done deal. Regulators, and the companies’ competitors and customers are worried and time is pressing. Should the deal deadline be missed, it is very likely that VMware will find itself left in the lurch at the altar, and all alone to pick up the pieces.

- Martyn Warwick, Editor in Chief, TelecomTV