CMA deepens probe into VMware-Broadcom merger over concerns it could hike server prices in UK

The UK Competition & Markets Authority has become the first antitrust watchdog to express concerns over the impact Broadcom’s acquisition of VMware could have on server pricing and innovation

The Competition & Markets Authority (CMA) is deepening its investigation into the VMWare-Broadcom merger, after concluding the $61bn deal could hamper innovation and drive up the cost of servers to UK government departments, banking firms and telcos.

The CMA gave Broadcom five working days to issue an undertaking to address these concerns on 22 March 2023, but the Authority has now confirmed in a statement that the company declined, meaning its investigation into the deal is now entering its second phase.

This phase of the investigation will be overseen by a four-strong team, headed up by CMA inquiry chair Richard Feasey, appointed by the Authority on Wednesday 29 March.

This group has until 12 September to investigate and report on whether the merger is likely to result in a “substantial lessening of competition within any market or markets in the United Kingdom for goods and services”, said the CMA, in its Phase Two terms of reference document.

The first phase of the investigation looked at how the deal may impact the supply of VMware software and hardware, as well as its compatibility with server hardware components sold by Broadcom’s rivals.

“The CMA is concerned that the deal could enable Broadcom to harm its rivals by preventing it from being able to supply VMware-compatible hardware components – such as [network interface cards] and storage adapters – reducing competition and ultimately choice for customers,” said the CMA in its 22 March statement.

“The investigation also found the merger may result in Broadcom obtaining commercially sensitive information (such as details of new planned products) that its hardware rivals currently supply to VMware. The CMA is concerned this could damage innovation and leave customers worse off, [as it will result in] fewer product updates or new features.”

Read more about the proposed VMware and Broadcom deal

Alex Haffner, competition partner at law firm Fladgate, said the CMA’s action in this case is significant as it marks it out as the first competition regulator to express antitrust concerns about the deal.

“The CMA’s decision on the proposed tie-up between Broadcom and VMWare is the first one by a competition regulator to express concerns about its impact on competition on any relevant market – it has to date received clearances from Australia, Brazil and Canada,” he said. “As such, it is an important reference point and likely to be scrutinised carefully by other competition regulators ([including] the EU Commission) who are still assessing the deal.

“The CMA’s decision … is notable because it is based on theories of harm that involve the merging parties leveraging market power in one market (server operability) to harm competitors in a vertically related market (components),” said Haffner. “If these theories of harm are to stick, it is likely the parties will need to be creative to come up with remedies to assuage the CMA’s concerns.”

The VMware-Broadcom deal was first announced in late May 2022, following days of speculation that news of a merger between the two entities was on course to break imminently.

It was not until six months later the CMA announced that it was inviting comment from “any interested party” about the potential for competition issues to arise in the wake of the deal. And, on 25 January, the Authority confirmed it would be launching an inquiry into the merger as a result of the feedback gained.  

During the interim period, between the merger being first announced and the CMA getting involved, VMware’s CEO, Raghu Raghuram, has repeatedly spoken out in defence of the deal, including during an interview with Computer Weekly in early August 2022, where he said Broadcom wanted to buy VMware to “build and grow” the company and help achieve its goal of becoming one of the “leaders in infrastructure software”.   

Several weeks later, during the VMware Explore user conference in San Francisco, Raghuram went on record to say the merger was on track and things were operating on a “business-as-usual” basis within the walls at VMware. “Our employees know what the roadmap ahead is, and we have continuous communication with our employees in understanding what’s going on, and so they’re all kept up to date all the time,” he said. “They are more or less focused on the job at hand.”

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