China may delay $69bn Broadcom-VMware deal, South Korea conditionally approves it

Bejing mulls response to deal in light of US tightening AI chips rules

In what appears to be a retaliatory move against the recent expansion of chip export controls by the Biden administration, Beijing is reportedly contemplating delaying the approval of US chipmaker Broadcom Inc's $69 billion merger with cloud computing company VMware.

The decision comes as China's State Administration of Market Regulation explores the possibility of extending the review process indefinitely, according to a report by the Financial Times, which cites three anonymous sources familiar with the situation.

The move is seen as a response to Washington's updated export controls, designed to close a loophole that allowed companies like Intel and Nvidia to continue selling AI chips to China.

The new regulations introduced by Biden administration even affect non-AI-focused chips, including Nvidia's advanced processors for video gaming, which are now restricted for sale in China under the expanded rules.

China's regulators are unlikely to formally block the Broadcom-VMware deal, but they may opt to delay the approval process until both parties involved decide to abandon it.

Two of the sources revealed that China's merger and acquisition approvals for US companies now necessitate additional consultations with the Ministry of Foreign Affairs and the State Council. This additional layer of oversight has the potential to slow down the approval process for major international deals like the Broadcom-VMware acquisition.

News of possible delays comes as South Korea approved the deal - with conditions attached. The county's regulators have voiced concern that the deal could harm the market for fibre channel host bus adapters (FC HBAs) and has stated that Broadcom must guarantee interoperability for competitors and new businesses for the next 10 years.

"We have concluded that VMware could take advantage of the position to delay or obstruct interoperability certifications for parts produced by Broadcom's competitors," South Korea's Fair Trade Commission said. "It can also use strategies, such as refusing certification requests by new players."

Broadcom, primarily known as a chipmaker, announced its intention to acquire VMware in May 2022, with a deal worth $61 billion in equity and the remaining amount in debt. This acquisition marks Broadcom's ambitious move into the enterprise software sector, signalling its desire to diversify its business.

The proposed deal with VMware, if completed, would grant Broadcom a foothold in the rapidly evolving cloud computing market, signifying the company's strategic shift toward broader technological domains.

The chipmaker had previously expressed optimism that the transaction would close within the current fiscal year. However, the FT report suggests that the delay in Chinese approval may affect this timeline.

Broadcom has made significant progress in obtaining regulatory clearances for the deal from various jurisdictions.

In July, the company secured legal merger clearance in countries such as Australia, Canada, Taiwan, Brazil, the European Union and South Africa.

Additionally, foreign investment control clearance has been granted in all necessary regions.

The acquisition had also undergone scrutiny from the UK's Competition and Markets Authority (CMA), which approved the deal after a detailed investigation.

Broadcom successfully obtained EU antitrust approval this year after making concessions to support competition with rival Marvell Technology.

China's strict oversight of chip industry deals has been notable this year, with Intel Corp's $5.4 billion deal to purchase Israeli contract chipmaker Tower Semiconductor being abandoned due to the merger agreement's expiration without regulatory approval from Chinese authorities.

Broadcom has not confirmed whether the merger would require Chinese approval. But under Chinese regulations, large multinational corporations, even if not Chinese, must submit their deals to China's State Administration of Market Regulation (SAMR) for anti-monopoly approval if they generate over $55 million in revenue from China.

In the last fiscal year, Broadcom reported $33 billion in revenue, with approximately 35% of that revenue coming from sales to China and Hong Kong.