(Bloomberg) -- Broadcom Inc. Chief Executive Officer Hock Tan is circling his latest target in a streak of software-company acquisitions, this time pursuing VMware Inc. to add steadier revenue flow and wider margins as a hedge against the dramatic ups and downs of demand in the semiconductor business.

The chipmaker could unveil an agreement of about $60 billion, or $140 a share, to acquire cloud-computing company VMware as soon as Thursday in what is likely to be Broadcom’s biggest deal ever, according to people familiar with the matter. VMware created the market for a type of software that lets businesses run corporate networks more efficiently, and recently has shifted toward serving clients who are moving those applications to the cloud, including through a partnership with web-services giant Amazon.com Inc. VMware also sells software for security, networking and managing mobile devices.

The purchase would align with Tan’s strategy of acquiring and keeping what he calls “franchises”—parts of companies that can maintain a robust market share in a profitable business without excessive investment—while quickly jettisoning any components that don’t fit with his plans. The executive made a name for himself by building Broadcom into one of the largest companies in the chip industry through a series of acquisitions, extracting value from assets that he saw as underperforming by shedding costs and units. Since 2018, Tan has turned his deal playbook on the software industry, starting with his $19 billion buy of CA Technologies, followed by a $10.7 billion purchase of Symantec Corp.’s business-facing product division.

Buying software companies lets a hardware maker like Broadcom tap into markets that generally carry wider profit margins and a more regular flow of sales—many software vendors sell via multiyear subscriptions or contracts and can count on those for recurring revenue—avoiding the volatility of the chip sector, which has been beleaguered by manufacturing snafus, shutdowns and supply shortages in the past several years. Next up could be VMware. While the company still has a market value north of $45 billion, its shares have declined nearly 30% in the past year. If Broadcom completes the VMware deal, it will bring the company’s business model to a 50-50 semiconductor-to-software mix, said Bloomberg Intelligence analyst Woo Jin Ho.

“VMware actually fits into the broader software strategy that Broadcom has been embarking on since 2018. They acquired CA, they acquired Symantec to broaden out the the infrastructure software portfolio, to diversify away from the cyclicality of the chip sector,” Ho said in an interview with Bloomberg Television. “What VMware brings to the table is to extend that infrastructure software more towards the cloud over the long term.”

Chip companies are often at the mercy of purchasing cycles that go up as demand for computers and other devices rises or with accelerating business environments, before falling off, producing lumpy quarterly results. The instability for hardware vendors has been worsened by supply chain shortages that have hurt the availability of components, while Covid-19 and the war in Ukraine also have disrupted shipping routes. 

Software companies generally can count on a more constant and predictable flow of revenue than hardware vendors. Even so, VMware has seen sales growth shrink in the past few years as it struggled to adapt to a market in which its flagship technology—virtualization software that lets customers run more than one application on each server—matured and was then bypassed by newer technologies designed for the cloud. Annual revenue growth has hovered at 9% for the past two fiscal years and is forecast to remain in that neighborhood this year—VMware predicted long-term growth of 8% to 10% at an analyst day presentation. Still, that’s stronger than expected growth in Broadcom’s current infrastructure software portfolio, which has a 5% to 6% growth forecast, Ho said. “VMware would be the crown jewel of Broadcom’s software division,” said Angelo Zino, an analyst at CFRA.

Acquiring VMware would roughly triple the size of Broadcom’s software offerings, according to a note from Sanford C. Bernstein & Co. And software companies also generally offer fatter profit margins. The Philadelphia Stock Exchange Semiconductor Index boasts an average gross margin of about 52%, 20 points narrower than that of the Standard & Poor’s 500 Software Index. VMware’s gross margin in the most recent quarter was 83% to Broadcom’s 66%, according to Bloomberg data.That said, by other measures VMware is running at a profitability level well below the rest of Broadcom’s software assets—it has an approximately 30% non-GAAP operating margin, compared with the roughly 70% Broadcom is getting from the segment, Bernstein said.  That means that should it acquire VMware, Broadcom would likely focus on squeezing costs, as it has with past acquisitions, including its software moves for CA and the Symantec unit.

While there are clear reasons why it makes sense for hardware companies, especially chipmakers, to buy software firms, it’s less clear that the deals help the target companies keep up a strong pace of product innovation. Intel Corp.’s purchase of security software maker McAfee, for example, never lived up to the promised technological synergies the chipmaker pitched, and while VMware thrived for years under its first owner—storage hardware company EMC Corp.—it fared less well once the company now known as Dell Technologies acquired EMC. 

With VMware’s legacy virtualization software fading, to keep up growth the company may need additional investments to return to tech market leadership. That may not be in Tan’s plan for the company. Because he frequently looks to cut costs at businesses Broadcom acquires, VMware may find itself starved for research and development money or other investments.

Broadcom cut the cost base at CA and the Symantec business by 60% to 70%, according to Bernstein. A similar move at VMware could yield $5 billion in savings, the analysts wrote.

In any case, the deal would benefit VMware shareholders like Michael Dell and private equity firm Silver Lake. And if Tan can deliver the benefits he’s sure to promise in announcing the purchase, it might even be a coup for Broadcom’s shareholders.

“It’s worked out great for him because he’s buying these low-growth kind of companies that maybe don’t have the type of margin profile that they should have,” said CFRA’s Zino. “And then he just really cuts a lot of the operating expenses, significantly improves the free cash flow potential and essentially rewards investors over time because he returns a vast majority of that excess free cash flow back to shareholders, primarily through dividend hikes.”

If the deal gets done, it’ll be the biggest move yet in Tan’s quest to create synergies where the market didn’t expect any. The size of the VMware deal would make it higher risk, and potentially higher reward, than most of his past bets.As Bernstein analysts wrote of Tan’s track record in deals: “Hock has yet to do a bad one, software or otherwise.”

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