VMware Pursuit Brings Broadcom’s ‘Illegal’ Past Into Focus

Earlier this year, Nvidia said regulatory scrutiny forced it to back out of a $40 billion deal to acquire fellow chip maker ARM, and now some of those same forces are reportedly taking a closer look at Broadcom’s potential purchase of VMware.

European antitrust regulators – who torpedoed a mega-merger between Nvidia and ARM earlier this year — have frequently tangled with San Jose, Calif.-based chip giant Broadcom, calling its past behavior “at first sight to be illegal” and submitting the company to a seven-year global agreement to avoid prosecution for anti-competitive practices.

Now those same regulators are reportedly examining Broadcom’s purchase of VMware, The $61 billion proposed merger was annoucned by Broadcom on May 26.

Every acquisition Broadcom has made since 2015 has needed approval from the European Commission, the enforcement arm of the European Union. Each one of Broadcom’s acquisitions were investigated and ultimately approved by the commission, starting with the purchase of Broadcom by Avago in 2015, then Brocade, CA, and Symantec Enterprise Security.

Then in 2019, the commission accused Broadcom of violating antitrust laws by forcing buyers to use a certain percentage of its microprocessors to qualify for steep discounts, driving prices lower to ensure smaller competitors could not compete in the European chip market for modems and set-top cable boxes.

To avoid prosecution, in 2020 Broadcom suspended all such contracts globally, for seven years. To ensure its good behavior, the company must meet with regulators to show proof that it is complying with the agreement.

These same regulators last year opposed Nvidia’s deal with rival chip-maker ARM and launched a phase 2 inquiry into whether the $40 billion transaction could bottleneck chip supplies and force buyers into unfair agreements – just as it accused Broadcom of doing in 2019.

Government scrutiny of the Nvidia-ARM deal – which was underway at the U.S. Justice Department as well as in Europe — was cited when Nvidia-owner SoftBank announced the merger was dead in February.

Regarding the Broadcom and VMware deal, The Financial Times first reported in June that the European Commission planned to undertake a more thorough, phase two review. So far regulators in Brussels told CRN they have not yet taken any official action on the deal.

“This transaction has not been formally notified to the Commission,” the body said in response to an email. “If a transaction has an EU dimension, it is always up to the companies to notify it to the Commission.”

Broadcom though appears to be ready for a lengthy review by estimating it will close the VMware transaction before October 31, 2023.

Here is how the European Commission has weighed its Broadcom decisions since 2015:

Broadcom and Avago

Dates of Inquiry: Oct. 2, 2015 – Nov. 11, 2015

Duration of investigation: One month

Length of report: 29 pages

Conclusion: The commission was concerned about overlapping products the two companies sold at the networking sublayer. However it noted that while competition was sparce, the buyers were more mature and capable of fending off anti-competitive practices.

“These customers are sophisticated market participants that will closely evaluate other options in case the merged entity would try to impose tying or bundling upon them, including the possible option to start in-house production of certain chips or to support entry.”

The commission won commitments from Broadcom, prompting the company to rewrite some of its existing contracts, but it did not oppose the deal.

Broadcom and Brocade

Investigation: March 17, 2017 – May 12, 2017

Duration: Two months

Length of report: 67 pages

Conclusion: The commission approved the deal only after it won commitments from Broadcom around its development and sale of fibre channel host bus adapters, (HBAs) “i.e. boards with firmware used mostly in servers to interconnect the server’s processor with storage hard drives or solid-state drives through a FC SAN Switch;” as well as commitments around Broadcom’s agreements with Cisco.

“To ensure the existence of strong deterrence on (Broadcom) that post-Transaction no Cisco competitively sensitive information would be used to the detriment of Cisco and to favour the FC ASIC or FC SAN switches of the Merged Entity. The implementation and monitoring of the Final Commitments will be ensured by a monitoring trustee. The monitoring trustee will have extensive powers to verify that the firewalls and relevant measures to protect Cisco‘s confidential information are implemented, including having full access to the Parties’ documents, personnel and facilities.”

Broadcom and CA Technologies

Investigation: Sept. 12, 2018 – October 12, 2018

Duration: One month

Length report: 3 pages

Conclusion: “After examination of the notification, the European Commission has concluded that the notified operation falls within the scope of the Merger Regulation and of paragraph 5(b) of the Commission Notice on a simplified procedure for treatment of certain concentrations under Council Regulation (EC) No 139/2004. For the reasons set out in the Notice on a simplified procedure, the European Commission has decided not to oppose the notified operation and to declare it compatible with the internal market and with the EEA Agreement.”

Broadcom and Symantec Enterprise Security Business

Start date: Sept. 26, 2019 – Oct. 30, 2019

Duration of investigation: One month

Length of report: 12 pages

Conclusion: “There is a large number of alternative suppliers of data loss prevention software active both worldwide and in the EEA. All of these suppliers, including McAfee, Digital Guardian, Fidelis Cybersecurity and Venustech, as well as Forcepoint and RSA, will continue to compete effectively with the merged entity post-Transaction. Finally, the evidence on file suggests that the Parties are not particularly close competitors in this market. While SESB is the market leader, Broadcom is a small player on this market and its ‘CA Data Protection’ product is a legacy solution … therefore, Broadcom currently does not seem to constitute an important competitive constraint in this market.”

Broadcom Avoids Prosecution For Anti-Competitive Practices

Start date: October 2018 — October 2020

Duration of investigation: Two years

Conclusion: Broadcom violated European law by forcing six of its customers to buy a percentage of all of their chips from Broadcom, in order to win better pricing. The deal throttled smaller manufacturers who could not compete with the steep discounts Broadcom offered, the European Commission said. As a result, Broadcom was forced to tear up those contracts across the globe – except China — and submit to a seven-year agreement with check-ins by regulators to ensure it is keeping faith with the agreement with regulators.

Speaking for the commission, Executive Vice President Margrethe Vestager said Broadcom had sought to strangle the European supply of chips used in TV and cable set top boxes through six of its top customers.

“Broadcom … was abusing its dominant position by engaging in exclusivity and leveraging dealings with key customers,” European Commission executive vice-president Margrethe Vestager said in an October 2020 statement. “We had also found that Broadcom‘s behaviour (sic) would cause serious and irreparable harm to competition if not quickly brought to an end, as competitors were about to be marginalised (sic) and pushed out of the market … We therefore ordered Broadcom to stop this behaviour, which we considered at first sight to be illegal, while our in-depth investigation on the merits of the case continued.”

Vestager said “Broadcom approached us with a commitments proposal, aimed at addressing our concerns” with the commission that forces it to meet routinely with regulators to offer proof that it is abiding by its terms.

The agreement stops Broadcom from forcing direct or indirect customers from buying a percentage of their total chip supply from Broadcom. Additionally, Broadcom is forbidden from threatening to withhold a customer’s supply of chips if the customer refuses “to the purchase of any minimum quantity of other chipsets” from Broadcom.