Shareholders are hoping that the meeting between President Biden and Chinese President Xi Jinping at the APEC summit in San Francisco this week may provide the spark to prompt China to approve Broadcom’s merger deal with VMware.
There is a lot at stake from both a financial and strategic perspective, particularly for VMware investors. The situation for them is complex and almost unprecedented.
Broadcom’s merger with
VMware
(ticker: VMW), announced in May 2022, is one of the largest technology deals ever and the value of the transaction has surged with
Broadcom stock
(AVGO). The deal is now worth more than $80 billion, Barron’s estimates, up from the original $61 billion.
All the deal needs to close is Chinese regulatory approval. That hasn’t been forthcoming; the holdup is believed to be political. Broadcom and VMware are based in Silicon Valley but Broadcom gets about a third of its revenue from China, according to its 2022 10-K.
The overwhelming majority of VMware holders stand to receive merger consideration now worth about $194 per VMware share, Barron’s estimates. This compares with VMware’s recent stock price of $149.49, which is up 0.2% in Tuesday’s session. Anyone buying VMware shares now, however, likely will get $142.50 in cash.
The high value of the merger consideration reflects the run-up in Broadcom stock, which has gained about 75% since the deal was announced. Broadcom is up 1.6% to $961.87 Tuesday after hitting a record high earlier in the session.
Nearly all VMware shareholders are effectively locked up without access to their investments since the merger consideration election period ended on Oct. 23. This has rarely happened in merger deals and doesn’t sit well with some VMware investors. Companies normally hold elections when they have gotten needed regulatory clearance and promptly pay out merger consideration to investors.
Broadcom was ready to close the deal as scheduled on Oct. 30. When Chinese approval didn’t come through, Broadcom said on Oct. 30 that it expected to close the deal “soon” and “in any event prior to the expiration of their merger agreement.” That date, Nov. 26, is less than two weeks away.
Investors fear the deal could become a casualty of deteriorating relations between the U.S. and China. The situation is hard to assess, with many investors viewing China as a black box.
Broadcom CEO Hock Tan’s view has been that the delay in the deal closing is related to bureaucratic issues. The Financial Times has reported the delay is political. With politics the likely cause of the delay, VMware investors are hoping that talks between Xi and Biden go well and may prompt China to OK the transaction.
Investors are aware that
Intel’s
deal to buy
Tower Semiconductor
was scrapped this summer after China refused to OK it.
One issue is whether Broadcom and VMware agree to extend the merger past the current termination date on Nov. 26 if Chinese approval isn’t forthcoming.
If the deal dies, VMware stock could decline, possibly to around $130, but assessing that amounts to guesswork, merger arbitragers tell Barron’s. VMware traded below $100 before the deal was announced last year and now trades for about 20 times current-year earnings. It’s possible the stock could rally from current levels given the strength in the tech sector this year.
It’s also possible but unlikely that Broadcom would try to close the deal without Chinese approval. Given that its China sales are so important, Broadcom probably doesn’t want to alienate the Chinese authorities.
Broadcom didn’t immediately respond to a request for comment.
Here’s some more of the relevant background for VMware shareholders.
Broadcom held an election period for VMware holders in mid-October during which they could elect to receive stock or cash consideration. The stock election (0.252 shares of Broadcom for each VMware share) was worth considerably more than the cash election of $142.50 per VMware share.
The stock election is now worth about $242 per VMware share (0.252 times the Broadcom price of about $962).
Not surprisingly, some 96% of VMware holders elected to receive stock in the election period that ended on Oct. 23. However, Broadcom is capping the stock election at 50% of the total consideration.
As a result, those electing stock will get roughly 52% stock and 48% cash, a package now worth around $194 per VMware share assuming the deal closes, Barron’s estimates. But current buyers are likely to get just the cash consideration of $142.50 based on our reading of the language of Broadcom press releases and documents, and what arbitragers tell Barron’s.
So why is VMware trading close to $150? The stock, for starters, is thinly traded with nearly all of it locked in existing elections. Volume today is less than 200,000 shares. And there is some hope that Broadcom could reopen the election period if the delay in Chinese approval drags on. It’s also possible that VMware stock could rally if the deal dies.
It’s a complex situation with a lot at stake for U.S.-China relations and investors.
Write to Andrew Bary at [email protected]
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