Semiconductor and software giant Broadcom Inc. will acquire cloud services firm VMware in a cash-and-stock deal for $61 billion.

The valuation is based on the closing price of Broadcom common stock on May 25, 2022, the U.S.-based chipmaker says in a statement.

This is the second-biggest deal globally so far this year after Microsoft Corp's $68.7 billion buyout of video game maker Activision Blizzard Inc.

Following the closing of the deal, the Broadcom Software Group will rebrand and operate as VMware, incorporating Broadcom's existing infrastructure and security software solutions as part of an expanded VMware portfolio. Broadcom will also assume $8 billion of VMware's net debt.

Under the terms of the agreement, VMware shareholders will receive either $142.50 in cash or 0.2520 shares of Broadcom common stock for each VMware share.

The shareholder election will be subject to proration, resulting in approximately 50% of VMware's shares being exchanged for cash consideration and 50% being exchanged for Broadcom common stock, the companies say.

Based on the closing price of Broadcom common stock on May 25, 2022, the total $138.23 per-share consideration represents a 44% premium to the closing price of VMware common stock on May 20, 2022, the last trading day prior to media speculation regarding a potential transaction.

Upon closing of the transaction, current Broadcom shareholders will own approximately 88% and current VMware shareholders will own approximately 12% of the combined company on a fully diluted basis.

Michael Dell and Silver Lake, which own 40.2% and 10% of VMware shares outstanding, respectively, have signed support agreements to vote in favour of the transaction, so long as the VMware Board continues to recommend the proposed transaction with Broadcom, the statement says.

"Combining our assets and talented team with Broadcom's existing enterprise software portfolio, all housed under the VMware brand, creates a remarkable enterprise software player. Collectively, we will deliver even more choice, value and innovation to customers, enabling them to thrive in this increasingly complex multi-cloud era," says Raghu Raghuram, chief executive officer of VMware.

To fund the acquisition, Broadcom has obtained commitments from a consortium of banks for $32 billion in new, fully committed debt financing.

Broadcom says it expects to maintain its current dividend policy of delivering 50% of its prior fiscal year free cash flow to shareholders.

The transaction, which is expected to be completed in fiscal year 2023, is subject to the receipt of regulatory approvals.

"VMware's platform and Broadcom's infrastructure software solutions address different but important enterprise needs, and the combined company will be able to serve them more effectively and securely," says Tom Krause, president of the Broadcom Software Group.

By bringing together the complementary Broadcom Software portfolio with the VMware platform, the combined entity will provide enterprise customers an expanded platform of critical infrastructure solutions to accelerate innovation and address the most complex information technology infrastructure needs, the two companies say.

Broadcom Software Group

Broadcom buys VMware for $61 bn in 2nd biggest deal of 2022