One of tech’s largest acquisitions will place VMware as strategic and financial centerpiece of Broadcom Software

Broadcom will position VMware at forefront of its software strategy

On May 26, Broadcom (Nasdaq: AVGO) agreed to purchase VMware (NYSE: VMW) at an enterprise value of $69 billion, making it one of the largest tech acquisitions in history. While Broadcom is no stranger to software acquisitions, this transaction will be its most transformative as VMware becomes both the brand and growth driver behind Broadcom Software. If the transaction closes, the new Broadcom will find itself evenly balanced between its semiconductor and infrastructure software businesses. After market close on the day of the announcement, investors on each side of the transaction viewed the proposed deal favorably, signaling shareholders’ confidence in management’s ability to use past experiences to generate free cash flow through the integration of the two companies, bolstered by VMware’s cost structure and pervasive role in enterprise IT.

Should the deal close, VMware will be led by Broadcom Software Group’s current president, Tom Krause, who has a financial background and will report to Broadcom CEO Hock Tan. As with past acquisitions, Broadcom’s primary goal will be to improve profitability through cost synergies, mostly related to redundant headcount. While margins will certainly benefit, VMware’s innovative agenda, spearheaded by Pat Gelsinger and since adopted by current CEO Raghu Raghuram, hangs in the balance, with the outcome dependent upon Broadcom’s desire to drive synergies with VMware in both R&D and go to market. If Broadcom’s acquisitions of CA Technologies and Symantec are any indication, VMware’s future in the cloud and at the edge may be muted. But it is still early days, and commentary from Broadcom management suggests a different course of action relative to past acquisitions with a strong intent to invest in VMware’s core software-defined data center (SDDC) stack.

A deal could bring VMware back to its data center roots

Since the 2016 launch of VMware Cloud Foundation (VCF), VMware has insisted on making its trusted virtualization software relevant beyond data center walls by delivering native, turnkey solutions with all major cloud service providers (CSPs). The rise of cloud-native development through containers and Kubernetes has presented VMware customers with an alternate route to the public cloud, but the 2019 acquisition of Pivotal and resulting Tanzu portfolio — while still built and delivered via ESXi — allowed VMware to position as a complement to containers, rather than a competitive threat.

Often still defined as the company that pioneered enterprise virtualization, VMware has proven its ability to adapt over the past two decades alongside market trends, including cloud computing and containerization, both of which have accelerated VMware’s transition to a Subscription & SaaS company, with related revenue comprising 29% of total business in 1Q22. Broadcom plans to upsell Subscription & SaaS alternatives to legacy customers, including those demanding “as a Service” software inside the data center.

However, given the growth in Broadcom’s software business stems from mainframe customers, we cannot help but wonder if VMware’s push to the cloud will be stalled should the deal close. From a cost perspective, customers may be less incentivized to move their VMware workloads to the cloud, and instead could containerize applications to avoid incurring the cost of VMware or could simply keep their VMware applications on premises, which would erode some cross-selling opportunities for Broadcom. Further, given Broadcom’s focus on revenue-rich products, we can expect detracted focus from the Tanzu initiative, which could bring VMware further back to its data center roots and, in a worst-case scenario, put it back at war with the hyperscalers, as was similarly seen in the early days of EMC.

With VMware’s success hinging on partners, Broadcom cannot afford to decelerate partner investment

Historically, Broadcom’s corporate sales model has been largely direct, but considering the scale of VMware’s partner network, the pivot toward indirect sales motions is inevitable, especially as Broadcom looks to build out a $20 billion software enterprise. Management indicated it will sell directly into 1,500 core accounts while likely providing hands-on professional and support services to these customers, which Broadcom chalks up to a simplification of its overall business model. This suggests, however, that there will be over 300,000 vSphere adopters still left in the hands of partners — and given Broadcom’s lack of comparative experience navigating channel relationships, the company will be most successful if it lets VMware go to market independently while preserving its relationships with strategic resellers, especially Dell Technologies, which is responsible for roughly one-third of VMware’s revenue.

Further, despite a thin R&D budget, Broadcom will still deliver new product integrations with VMware, which could present opportunities for distributors, VARs and potentially ISVs looking to integrate and package their solutions with VMware and Broadcom. However, management has been unclear regarding acquisition synergies, suggesting opportunities could be minimal, and except for some OEMs potentially hoping Broadcom will help level the playing field, partners are likely concerned.

This is particularly true as prior to the announcement VMware was in the middle of overhauling its partner program, announcing promises to improve coselling motions between direct sales teams and VARs, in addition to investments in digital and automation technologies designed to lower implementation costs and improve partner profitability. With Broadcom’s cost structure in place, investments in VMware resources and training programs for partners could decrease, which, when combined with the already higher prices we can expect for VMware products, will present a challenge for partners across the spectrum.

For Broadcom, it is all about profitability

The proposed acquisition can be viewed as another one of Broadcom’s attempts to diversify its hardware portfolio through high-margin software, and with VMware, Broadcom will use redundant costs and license prices as levers for margin expansion. Profit growth will have to come in the form of cost consolidation as VMware’s top line will decelerate, especially as profitable software maintenance revenue streams erode as customers transition from licenses to subscriptions. For context, in 2021 VMware’s SG&A costs accounted for 40% of revenue, a high percentage relative to peers, leaving room for Broadcom to offload redundant resources, particularly in back-office positions.

Meanwhile, as Broadcom prioritizes margins at the expense of top-line growth, at least in the near term, we can expect the sales and marketing line to be impacted, with Broadcom making use of its existing sales teams and channel distribution partners to sell into existing strategic accounts. R&D is perhaps the biggest question mark weighing on the pro forma company, which we expect will require a minimum 15% reduction in spend to meet EBITDA targets, when applying the S&M and G&A estimates shown in Figure 1. The R&D budget will undoubtedly be cut, but the degree depends on the level of “central engineering” synergies Broadcom is willing to form with VMware to deliver new products, with at least basic CI/CD (continuous integration/continuous delivery) procedures in place.

Leveraging VMware’s relationships with the cloud providers, specifically Amazon Web Services (AWS) (Nasdaq: AMZN), it is possible new product synergies could be formed without driving significant R&D investment. However, it will still require a level of commitment from Broadcom to invest in the VMware portfolio beyond SDDC, which does not appear on the company’s radar. This structure could also impact existing offerings like SASE and Project Monterey, which happens to align with Broadcom’s gradual shift away from x86 architectures. This is especially true as Broadcom figures out where there is overlap between its existing software portfolio, which already has plays in security, infrastructure management and FC SAN (fiber channel storage area network) and VMware.
Broadcom Software acquires VMware
At the end of the day, cost actions will run through the income statement over the next three years in a way that gets Broadcom to $8.5 billion in pro forma adjusted EBITDA. Currently estimated at $4.7 billion for FY22, Broadcom would need to grow adjusted EBITDA by a 22% CAGR to achieve this goal, resulting in a drastic operational change for VMware and potentially a loss of momentum outside vSphere, vSAN, NSX and the vRealize suite, which may not have an impact on near-term results but certainly risks VMware’s long-term attractiveness.

Rival bid seems unlikely despite go-shop provision

While the premium pledged by Broadcom in its bid for VMware is likely to ward off most, if not all, potential rival bids, the current agreement contains a 40-day go-shop provision that allows VMware to explore other buyers. Ultimately, any potential bidder would need to have a significant amount of capital ready to be utilized and be willing to push VMware’s valuation further. Given their respective sizes, a hyperscaler is the most likely candidate, with AWS top of mind considering its strategic reseller and product alliance with VMware.

However, TBR believes this is still unlikely, and if any of the cloud providers were to buy VMware, it would be widely perceived as an attempt to buy IaaS revenue. Further, we believe that the cloud providers, while some are more prone to locking in customers than others, generally respect VMware’s neutral position in the market and are cognizant of the fact that owning VMware could create a host of challenges for customers. It is also plausible some of the hardware vendors would like to get in on the deal, but OEMs could be skeptical following last year’s spinoff by Dell Technologies.

TBR takeaway

Considering Broadcom’s aggressive profit targets and previous history running software businesses, customers, partners and employees appear to share mutual concern regarding what will become of Broadcom Software should the deal close. With cost reductions bound to occur across business functions, including R&D, lack of investment raises questions as to how VMware will remain competitive in markets beyond traditional virtualization.

However, Broadcom management has also indicated that VMware will not operate like Symantec and CA Technologies, given its unique market position — and if VMware can materialize R&D to drive new product synergies, the company could at a minimum maintain its trajectory of midsingle-digit growth. VMware’s well-established relationships with channel partners will also help Broadcom establish a large software empire, but this would be contingent on the company’s willingness to invest in less profitable, yet emerging business units, with the final decision coming down to whether management believes the initiative will be accretive to free cash flow.

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ManTech acquired by The Carlyle Group

ManTech will be taken private through a $4.2B all-cash buyout

On Monday, ManTech (Nasdaq: MANT) agreed to be acquired by private equity specialist The Carlyle Group Inc. (Nasdaq: CG) — the same investment firm that purchased Booz Allen Hamilton (BAH) after BAH split from Booz & Co. in 2008, took BAH public in a 2011 IPO and remained a stockholder until 2016. ManTech has been a publicly traded company since its IPO in 2002. Carlyle agreed to pay $96 per share for ManTech (on Friday, May 13, ManTech’s stock closed at $81.97 per share); taking into account ManTech’s $240 million in net debt, the total transaction value will be $4.2 billion, or roughly 1.6 times ManTech’s trailing 12-month (TTM) revenue of $2.596 billion as of 1Q22.

The sale to Carlyle ends 3 months of speculation about ManTech’s future

ManTech co-founder and longtime CEO (40 years) and Chairman (42 years) George Pedersen stepped down as chairman of the board in 2020 and officially retired from the company’s board in February 2022. His retirement from the board sparked rumors that the company was for sale, and industry observers wondered what would become of Pedersen’s controlling block of voting shares. According to ManTech’s 2021 10-K report, Pedersen held 32% of the common stock as well as nearly 83% of the combined voting power vis-à-vis Class B stock ownership. A Reuters report on Feb. 2 suggested that Pedersen’s family wanted to resolve his estate plan following his retirement, including exploring options for his controlling stake. Carlyle’s per-share purchase price represents a 32% premium on the price of ManTech’s stock as of market close on Feb. 2.

Private equity steps up to buy ManTech, perhaps in lieu of peer interest

When rumors surfaced that ManTech was for sale, it was initially thought that ManTech’s acquirer would be a federal IT peer. Leidos, federal IT’s largest traditional systems integrator, was on the short list of potential buyers. Even after spending over $2.5 billion during 2020 and 2021 on acquisitions, Leidos (NYSE: LDOS) entered 2022 flush with liquidity after back-to-back years of record sales and backlog, sustained profitability, and stronger-than-expected cash from operations in 2021. Leidos certainly had the fiscal war chest to support another strategic purchase, even as it retires debt from its recent acquisition spree.

General Dynamics Technologies (GDT), specifically GDT’s Information Technology (GDIT) segment, was considered a potential buyer, having fiscal resources on par with Leidos, thanks to a corporate parent with a $60-plus billion market capitalization. GDIT has completed its acquisition of CSRA, purchased in 2018 for $9 billion, but the integration process was protracted, reviving speculation that originally surfaced around GDIT’s troubled purchase of Vangent in 2011 that the company struggles to assimilate acquired peers.

Parsons (NYSE: PSN), a longtime construction contractor for the Department of Defense (DOD) and a more recent entrant into the federal IT fray, was also thought to have an interest in ManTech as a way to continue diversifying its portfolio by building out its federal IT capabilities. Buying ManTech would have immediately garnered Parsons the scale to support large federal IT modernization programs, as well as a sizable presence in the Intelligence Community (IC). (ManTech is estimated to generate $1 billion annually from the IC.) However, Parsons would have been forced to rely more heavily on stock to facilitate the transaction, and it was thought the Pedersen family would be less amenable to such an arrangement.

Buying ManTech would have imparted similar benefits upon KBR Inc. (NYSE: KBR) (about $5 billion in federal IT revenue), also believed to be a potential buyer looking to diversify its solutions focus into federal enterprise technology but facing the same potential challenges structuring the transaction in a way that would be favorable to the Pedersen family’s preferences.

Serial federal IT acquirer CACI International (NYSE: CACI) was also rumored to be in the mix to purchase ManTech, which would have expanded CACI’s annual federal IT revenue base ($5.8 billion as of 4Q21 on a TTM basis) past $8 billion in total value, surpassing BAH ($7.9 billion as of 4Q21 on a TTM basis) and SAIC ($7.3 billion as of 4Q21 on a TTM basis), and significantly narrowing the gap with Leidos ($11.8 billion as of 4Q21 on a TTM basis) and GDT (also $11.8 billion as of 4Q21 on a TTM basis, though this includes roughly $4 billion from GDT’s Mission Systems group).

With its recent purchases of Bluestone Analytics (3Q21), an unidentified space-focused company (also in 3Q21), SA Photonics (4Q21) and ID Technologies (1Q22), it appears that the focus of CACI’s M&A strategy is on expanding the company’s high-end, high-margin technology capabilities, particularly in areas that enable wallet-share gains with existing clients in the DOD and IC. CACI’s acquisitions of SA Photonics and ID Technologies also showcase CACI’s preference for leveraging M&A to capture first-mover advantage in solution areas or markets in which the company expects to experience accelerating demand from its core DOD and IC customers.

In addition to its large IC footprint, ManTech is a long-standing IT contractor to the DOD, particularly with its suite of cybersecurity solutions. ManTech’s legacy with the DOD and IC, along with its highly regarded security offerings, would have added value to any of the federal IT peers rumored to be interested acquirers, or other well-funded federal IT competitors (e.g., Accenture Federal Services [AFS], CGI Federal or SAIC). However, ManTech has been a margin laggard in TBR’s Public Sector IT Services Benchmark report in terms of relative operating margin performance. ManTech has been ranked ninth or lower (out of 13 benchmarked companies) in the benchmark report since 2013.

We believe that despite the lucrative nature of its cybersecurity offerings and its operations in the IC, ManTech has largely retained a high emphasis on labor-based services, keeping its margin performance below that of peers. Also impeding relative profitability is ManTech’s focus on being a low-cost but technically acceptable contractor, while peers like CACI, Leidos, BAH and GDT have increasingly recruited superior talent to support a more aggressive pivot up the value chain with their offerings (AI, analytics, cloud, high-end defense platforms, C5ISR [command, control, computers, communications, cyber, intelligence, surveillance and reconnaissance]). In short, ManTech’s federal IT peers might have viewed acquiring ManTech as too margin-dilutive, particularly as a strategic acquisition. TBR also notes that ManTech’s top-line performance has been impeded by the drawdown of military operations in Iraq and Afghanistan over the last decade, while its efforts to expand its footprint in the federal civilian market seemed to stall during late 2021.

Ultimately, it was The Carlyle Group, with over $325 billion in assets under management as of March 31, 2022, that made the purchase. We are not aware of the terms of any competing offers, though we believe ManTech did garner some interest from fellow investment group Veritas Capital — the private equity backer of the three-way merger between Peraton, Perspecta and Northrop Grumman’s IT services unit in early 2021. We expect Carlyle will implement across-the-board cost rationalizations following the acquisition (likely accelerating workforce attrition in an already fiercely competitive federal IT labor market). Carlyle’s deep fiscal pockets will provide ample funding for additional acquisitions to expand ManTech’s suite of offerings in AI, analytics, automation, advanced cybersecurity (e.g., cognitive security), systems engineering and solutions at the tactical edge.

In the end, ManTech may return to publicly traded status as a larger and more profitable federal IT peer with a broader and more lucrative suite of solutions better aligned with the federal embrace of digital technologies, in a scenario more reminiscent of BAH’s IPO in 2011 after three years of Carlyle’s restructuring. Conversely, Carlyle’s ultimate goal may be to sell ManTech to a larger federal IT peer with the fiscal wherewithal for a strategic purchase that will either further cement its leadership position (e.g., Leidos, GDT, BAH or SAIC) or catapult its scale (e.g., CACI, AFS, CGI Federal or even IBM Consulting) into direct contention with established federal IT leaders.

Capgemini aims for growth in digital marketing services

Building regional capabilities through acquisitions to disrupt the APAC market

In TBR’s most recent Digital Transformation: Digital Marketing Services Benchmark, my colleague Boz Hristov examined trends across different regions and wrote, “While regional nuances … compel vendors to build local resources to ensure they can tailor culturally aligned campaigns, the evolving nature of the DMS [digital marketing services] market is also creating country-specific openings. For example, the last three Olympic Games including PyeongChang (South Korea), Tokyo (Japan) and Beijing (China) have been driving investments and opportunities within Southeast Asia.” In covering Capgemini for more than a dozen years, I’ve seen how the company has been able to combine internal capabilities development and highly strategic acquisitions to stay on the leading edge of trends across the IT services space, including digital marketing services. At the same time, acquisitions enable Capgemini to diversify its geographic reach outside its home market of Europe, namely in North America and APAC.


Overall, APAC is becoming a region of acquisition focus as Capgemini strives to diversify global revenues and expand work with local clients in the region. APAC is a major global service delivery location, but activities with local clients are limited outside of Australia and New Zealand. Recent acquisitions in APAC that build on Capgemini’s local market reach include those of Empired in Australia, around digital and cloud; Acclimation in Australia, around SAP consulting and systems integration; Multibook’s SAP global services line in Japan; RXP Services in Australia, around digital, data and cloud; and WhiteSky Labs in Australia around MuleSoft consulting.


Capgemini’s innovation, design and transformation brand, Capgemini Invent, is rolling out its capabilities across APAC. Capgemini is establishing a new network around frog, the brand experience design consulting arm of Altran. During 2020 frog scaled from about 500 people in the U.S. and Europe to about 2,000 by absorbing Capgemini Invent’s customer experience team and employees from Capgemini’s acquisitions of global design studio Idean, innovation firm Fahrenheit 212, agency June 21 and customer engagement marketing firm LiquidHub. Frog initially had one studio in Shanghai but has expanded in APAC with studios in Singapore; Hong Kong; Sydney and Melbourne, Australia; and India. Frog’s APAC business emphasizes industrial and special design, tied with the new Capgemini Engineering brand experience and design-led transformation.


In some ways, this is a natural outcome of making related tuck-in acquisitions: Eventually, Capgemini creates scale to establish a new business unit or service line. Additionally, it is a way of retaining acquired talent by showing that employees will be part of a special group assembled from similar acquisitions.

Tuck-in acquisitions supported digital services establishment in North America, providing use cases and lessons learned

In 2016, 2017 and 2018, Capgemini made several acquisitions in North America to initially build out its digital services capabilities, some of which now reside in frog. Fahrenheit 212, which Capgemini acquired in February 2016, enhanced Capgemini’s business transformation consulting and digital customer experience solutions portfolio. Lyons Consulting Group, which Capgemini acquired in September 2017, strengthened the company’s position in digital commerce, specifically around integrating Salesforce Commerce Cloud solutions. Idean, which Capgemini acquired in February 2017, expanded Capgemini’s digital transformation consulting capabilities and added seven digital design studios worldwide.


The acquisition of LiquidHub in February 2018 further expanded Capgemini’s digital services, notably digital consulting capabilities in North America. With LiquidHub, Capgemini gained customer experience capabilities and improved its ability to capture digital opportunities with clients in the U.S. LiquidHub augmented Capgemini’s client base by adding logos, such as Wells Fargo, Chase, Godiva, Subaru, Microsoft and Amgen, and improved Capgemini’s relationships with clients’ CXOs.

APAC will become a larger revenue contributor in the long term

By making acquisitions, expanding its portfolio, keeping up with trends around digital marketing services, and even leaning on its core strengths around engineering services, Capgemini could become more disruptive in the APAC market in the very near term. The vendor’s combined revenue from APAC and LATAM accounted for 7.8% of total revenue in 2021 and increased 26.2% year-to-year as reported in euros, outpacing revenue growth in other regions.


TBR’s most recent report on Capgemini was published on March 7 and provides a detailed analysis of the company’s performance and investments in 4Q21 and 2021. Recent deals such as with Volvo Cars to enable digital transformation of the client’s operations in the Asia-Pacific Economic Cooperation by implementing Salesforce solutions such as Sales Cloud, Service Cloud, Marketing Cloud, Experience Cloud and Configure Price Quote software exemplify Capgemini’s activities that are supported through investments in digital and cloud capabilities. APAC provides opportunities for Capgemini and might be even better suited to pave the way to growth now that the company’s home market of Europe might be disrupted by the war in Ukraine. The deal with Volvo Cars provides Capgemini with a good opportunity to expand into the emerging China market, as Volvo is a well-known European brand but is now managed out of China.

Lockheed Martin forced to abandon $4.4B acquisition

On Feb. 13 Lockheed Martin (NYSE: LMT) pivoted and severely altered its FY22 outlook by withdrawing from its $4.4 billion plan to acquire missile and rocket propulsion expert Aerojet Rocketdyne (AR) (NYSE: AJRD) after months of mounting antitrust pressure and the recent unanimous U.S. Federal Trade Commission (FTC) decision to sue Lockheed Martin to obstruct the planned acquisition of AR.

Lockheed Martin looked to challenge Northrop Grumman for missile and rocket propulsion market dominance

In December 2020 Lockheed Martin announced it had entered into a definitive agreement with AR to acquire the missile and rocket propulsion innovator. With this proposed purchase, Lockheed Martin indirectly revealed its plans to disrupt the market dominance Northrop Grumman (NYSE: NOC) has enjoyed since 2018 when it purchased renowned rocket booster manufacturer Orbital ATK. Lockheed Martin hoped that its acquisition of AR would follow a similar trajectory as Northrop Grumman’s purchase of Orbital ATK, where the FTC would approve the acquisition so long as Lockheed Martin followed FTC stipulations, such as refusing to discriminate access to its missile system products and services to competing contractors.

With the world’s largest defense contractor planning to dedicate significant resources to acquire AR, Lockheed Martin expected the FTC to approve its acquisition as the combination of Lockheed Martin and AR would be a stronger competitor against Northrop Grumman, giving the U.S. government an additional option when selecting contractors. Expecting approval in 1Q22, Lockheed Martin forecasted its FY22 based on gaining an expanded propulsion systems and rocket engines portfolio and priority access to AR resources during the ongoing supply chain chaos seen in all industries.

After a year of setbacks, the FTC intervenes with Lockheed Martin’s proposed acquisition

Lockheed Martin experienced several setbacks almost immediately after announcing the planned acquisition. In February 2021 Raytheon Technologies (NYSE: RTX) stated it would implore regulatory agencies to block Lockheed Martin’s proposed purchase, arguing that the acquisition would give Lockheed Martin an unfair market advantage and Raytheon Technologies would have to purchase approximately 70% of its missile propulsion systems through Lockheed Martin as a result.

In July 2021 Senator Elizabeth Warren petitioned the FTC to probe the acquisition. Despite a bipartisan appeal to the Pentagon by a group of 13 U.S. Congress members in support of the merger in August 2021 and rumors circling that the Pentagon was in favor of the deal, the FTC voted 4-0 in January 2022 to file a lawsuit impeding Lockheed Martin’s $4.4 billion acquisition.

After initially postponing the vote, the FTC finally argued that Lockheed Martin would damage the national defense market and its rivals by acquiring the United States’ only independent provider of essential missile inputs. By reducing industry competition, Lockheed Martin would be able to relax innovation efforts and not be as competitive with its pricing, which could result in higher prices for the government. The acquisition would also potentially limit rivals access to resources and provide Lockheed Martin with unfair insight into their confidential information as AR operated as a subcontractor for many of them in the market.

Rather than face an arduous administrative trial against the U.S. government in mid-June, Lockheed Martin opted to simply abandon its acquisition plans.

Spinout will soothe some ailments for Dell and VMware

After over a year of discussions about the future of the Dell-VMware relationship, on April 14, 2021, it was confirmed that Dell (NYSE: DELL) will spin off its 81% majority stake in VMware (NYSE: VMW) to create two independent companies, effective CY4Q21. Evidenced by the market’s immediate reaction, the spinoff will be an overall positive move for both companies, giving Dell the chance to reorganize as a leaner, more targeted organization while offering VMware more go-to-market flexibility. Of course, as independent companies, Dell and VMware will face challenges, but increasingly differing portfolios, revenue models and market views will position both companies for longer-term success as separate entities. 

While mostly beneficial to VMware, the spinoff will offer stand-alone Dell some pockets of opportunity

While it is true that VMware has been Dell’s secret sauce for years, the announced spinoff will not necessarily cost Dell a long-term competitive advantage. Given the investments VMware has made in the last five years to accelerate its cloud strategy and position itself as more than a virtualization software company, it makes sense for VMware to operate separately. This is true even from a branding perspective, given Dell EMC’s play in many legacy markets.

However, there is also a potential upside for Dell, as the separation could enable the company to be less reliant on VMware and move beyond the big bets it placed on software-defined hardware solutions, which have generally performed below market expectations over the past few years. TBR suspects this strategy will allow Dell to become more focused on capturing the roughly 80% of enterprises that continue to operate on premises by providing them with access to cloud services and flexible pricing within their own data centers. There are already signs of this strategy developing.

While this release could be viewed as Dell giving the market a sense of what its post-spinoff portfolio could look like, at issue for the company is that it will now be more directly aligned with competitors such as Hewlett Packard Enterprise (HPE) (NYSE: HPE), Cisco (Nasdaq: CSCO) and Lenovo. Given HPE’s head start in the market through its GreenLake brand, Dell will be forced to explore new avenues for differentiation with Project APEX, and this could largely come down to Dell’s still unique five-year go-to-market agreement with VMware and any potential influence from Dell Technologies CEO and Chairman Michael Dell, who will remain VMware’s chairman of the board post-spinoff.

Apart from the near-term impacts and challenges in the competitive landscape, the spinoff is best viewed in opportunities. Following the sale of RSA and current speculation regarding Secureworks (Nasdaq: SCWX), Dell has recently focused on shedding underperforming brands to become a leaner organization. TBR suspects the spinoff of VMware, along with potential sale of integration PaaS (iPaaS) subsidiary Dell Boomi, will present an opportunity for Dell to streamline its operating structure and support the large investment it made in legacy EMC.

Additionally, TBR believes Dell has in many ways backed the innovative concepts and ideas that have emerged from VMware, namely intrinsic security, but have not been fully executed. As such, this spinoff could help Dell become more selective in which markets it wants to innovate and truly scale in, which may include enabling enterprise hybrid cloud, edge computing and data management. TBR expects Dell will turn to its partner network as an immediate avenue for growth, yet as the company more aggressively pursues new growth areas, tuck-in acquisitions that complement the EMC software cannot be ruled out and, down the road, could be essential to competing on par with peers.

Corporate structure does impact performance

In theory, the ownership structure and model of firms do not impact their business model, but in practice they sure do. The evolving case of Dell and VMware is one of the most — if not the most — complicated in the history of the IT market. VMware has grown accustomed to operating under a complex and dependent ownership structure; the firm has not been fully independent since EMC acquired it in 2004 for $635 million.

Since that time, VMware has been an embedded gem within both EMC and Dell, driving growth and profitability well above the traditional hardware segments that made up the majority of both firms. VMware’s consistent performance over the past 15 years is driving this latest change in ownership structure, with VMware set to be spun out of Dell and have its most independent ownership structure since 2004. For VMware, the change is all positive, giving the firm a single-minded clarity to operate in its own best interest, without the weight of supporting the corporate performance of either EMC or, more recently, Dell

With Nuance, Microsoft buys into healthcare and more

Microsoft announced its second largest acquisition in company history on April 12 with its intent to purchase Nuance Communications for $19.7 billion. Nuance’s presence in the healthcare vertical was touted as driving the move, but TBR believes much deeper and broader strategies were behind Microsoft’s decision.

Buying Nuance gives Microsoft an opportunity, but not a guarantee, to sustain growth

The announced acquisition of Nuance is the culmination of multiple elements of Microsoft’s recent performance, strategy and growth plans. On performance, Microsoft has benefitted from the COVID-19 pandemic perhaps more than any other technology vendor. Technology demands of businesses and consumers reacting to the pandemic boosted nearly all of Microsoft’s sprawling businesses, aside from an initial downturn in advertising spend that negativly impacted the LinkedIn business. From a strategy perspective, industry specialization has been a growing focus for Microsoft over the past five years, which is a shift in its mostly horizontal technology approach throughout its long history. Healthcare has been a frequent focus, but so too have retail, manufacturing and financial services specialization.

Lastly, in growth, Microsoft has been searching for the next $10 billion plus growth business. Microsoft Office 365 and Azure are clearly carrying Microsoft’s financial performance to date, but new addressable markets are needed to carry corporate growth and profitability for the next decade. While Nuance itself cannot assume that burden, the capabilities Microsoft will acquire will make many of its core technologies relevant to a much wider audience and set of use cases. In this way, the purchase of Nuance is similar to that of LinkedIn, with the full value of the investment hinging on successfully leveraging the technology to benefit as many other business units as possible.

Healthcare is large and ripe for IT investment

Unsurprisingly, healthcare has a profound impact on modern society, with an industry size to reflect that. In the U.S. alone, healthcare spending was $3.8 trillion in 2019, representing 17.7% of total gross domestic product (GDP). Furthermore, healthcare spending increased by 4.6% in 2019, a rate far outpacing growth of the overall economy.

Those facts are only part of the reason healthcare is such an attractive market for IT companies. While many verticals have fully embraced technology-driven transformation over the past decade, healthcare has been much slower to change. While technology has fundamentally changed the retail experience and business model, healthcare’s core operations and customer experience have remained much the same. Delaying this maturity in part are the strict regulations, such as the Health Insurance Portability and Accountability Act (HIPAA), which healthcare entities in the U.S. must meet, creating substantial risk for any IT budget decision makers planning to modernize their environments with cloud, let alone pursue innovative technologies such as IoT to improve the care they provide to patients.

There are glimmers of promise that the healthcare vertical is ready to begin transformations driven by increased technology adoption. Part of the shift is a generational change in doctors and providers. The influence that doctors have within the healthcare industry is one of the attributes that makes the healthcare vertical unique. Generational change among the physician ranks is having an outsized impact on the acceptance of technology within healthcare, but that is only one of the factors pointing to an increase in technology adoption.

Outside of shifting perception, the impact of COVID-19 has forced hospitals and patients alike to embrace solutions that have been around for years but are now a necessity to maintaining the patient-doctor relationship and safety, such as telemedicine. And with all major cloud technology providers offering HIPAA compliance, along with an ecosystem of partners that can leverage those delivery platforms, the aforementioned regulatory requirements are now less of a barrier in slow technology adoption.

TCS Will No Longer Be World’s 3rd Biggest IT Firm Because Of This Surprise Reason!

“The Atos-DXC transaction could form the world’s second-largest global IT services vendor, closer to the size of Accenture ($45 billion revenue in 2020) and larger than TCS ($22 billion revenue in 2020), according to Elitsa Bakalova, Senior Analyst at research firm Technology Business Research, Inc. … This is something the company has been pursuing in fits and starts over the last five years, mostly through acquisitions and changes in leadership in North America, Bakalova said.” —

Peraton’s purchase of Perspecta: The latest move in the quest for scale in federal IT

Scale is king

Peraton’s purchase of Northrop Grumman’s (NYSE: NOC) IT services business and pending acquisition of Perspecta (NYSE: PRSP) are clearly aimed at obtaining the scale necessary to compete for large enterprise and digital transformation deals, which have become common in the public sector IT services market.

Peraton is hardly the first in this space to make such transformative purchases. SAIC (NYSE: SAIC) made two large acquisitions in two years with Engility and Unisys Federal in 2019 and 2020, respectively; General Dynamics IT (NYSE: GD) purchased CSRA in 2018; and Leidos (NYSE: LDOS) perhaps started the trend with its purchase of Lockheed Martin (NYSE: LMT) Information Systems & Global Solutions (IS&GS) in 2016. As federal agencies seek to modernize and transform their operations to take advantage of emerging technologies such as cloud, 5G, AI, machine learning, and AR and VR, large monolithic deals, such as the Next Generation Enterprise Networks Recompete (NGEN-R), Defense Enterprise Office Solution (DEOS), Global Solutions Management – Operations II (GSM-O II) and Joint Enterprise Defense Infrastructure (JEDI), among others, illustrate the importance of being able to deliver these technologies and surrounding services at scale.

Companies such as Leidos, General Dynamics Technologies (GDT) and Booz Allen Hamilton (NYSE: BAH) have come out as the clear winners on the vast majority of multibillion-dollar deals like the ones mentioned above, thanks largely to their ability to deliver digital transformation at scale and proven past performance. TBR believes this trend is only going to become more pervasive in 2021 as the federal government pursues continued IT modernization across defense, intelligence and civilian agencies. Alternatively, if the federal government begins to move toward smaller contracts in terms of total value and/or duration, Peraton’s newly acquired scale would no longer be an asset. However, this is likely only a long-term concern, as the federal government shows no signs of ramping down contract sizes or duration for the foreseeable future.  

Why Perspecta had to die

Perhaps nothing illustrates the importance of scale more than the death of Perspecta. When the company was formed from the merger of DXC Technology’s (NYSE: DXC) public sector business with Vencore and KeyPoint Government Solutions in 2018, the clear intention was to create a federally focused contractor of scale that could compete for the large transformative deals that have become commonplace. Most important among these was the NGEN-R contract, whose predecessor, the NGEN contract, was held by Perspecta and represented nearly 20% of the company’s total revenue.

Despite this, Perspecta was unable to win the $7.7 billion NGEN-R, which was awarded to Leidos and will begin to ramp up in 2H21, leaving Perspecta with a loss of 19% of its total revenue, which cannot be replaced quickly enough to avoid steep losses year-to-year.

Losing the NGEN-R bid put Perspecta in a very difficult place, beyond the obvious financial burden. The company’s leadership has fielded tough questions from Wall Street about where the company is headed without NGEN-R. Perspecta has been unable to win any comparable deals, such as DEOS or GSM-O II, on which it has bid in the last year or two. Additionally, the company does not have as strong of a portfolio in emerging technologies as many of its competitors, and it is highly unlikely Perspecta on its own could have returned to growth quickly enough to appease its stakeholders. In this context, it is clear that Perspecta needed to die. With its pending sale to Peraton, there is opportunity to reemerge as a more formidable competitor in the federal IT services market, free from the burdens associated with its past failures as part of Peraton.

On Jan. 27, Perspecta announced its purchase by Peraton, a Veritas Capital portfolio company, for an all-cash price of $7.1 billion. This acquisition comes on the heels of Peraton’s purchase of Northrop Grumman’s IT services business, which closed Feb. 1 (outlined in TBR’s special report End game for Northrop Grumman’s IT services business). The resulting company, which will retain the Peraton name, will be a $7.6 billion to $7.9 billion business on a pro forma basis with approximately 24,300 employees, in TBR’s estimates.

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