Broadcom and VMware Merger: A Decision for Shareholders

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The pending merger between Broadcom and VMware on Oct. 30 presents a crucial decision for VMware shareholders. With a deal worth approximately $75 billion, these shareholders must now choose their preferred form of consideration.

Ticker symbol VMW, VMware investors have two options: accepting Broadcom (AVGO) stock or cash. Given the impressive 55% rally in Broadcom shares since the announcement of the merger in May 2022, it is advisable for VMware investors to consider stock as their preferred choice.

While VMware specializes in software development, Broadcom shines as a leading producer of semiconductors. The surge in Broadcom’s stock can be attributed to the increasing enthusiasm surrounding AI spending.

Investors who opt for cash will receive a considerably lower amount compared to the current VMware stock price. For those who do not make an election, cash will be the default option.

Here’s what you need to know: On Tuesday, VMware shares closed at $164.35, experiencing a slight decrease of 0.7%. In contrast, Broadcom’s shares decreased by 1.7% to $844.52. Broadcom has capped the equity consideration in the merger at 50%, indicating that VMware holders can expect a combination of both stock and cash.

As a VMware holder, you have the choice of receiving 0.252 Broadcom shares, currently valued at around $213, or receiving $142.50 in cash for each VMware share. The blended merger price consists of 50% stock and 50% cash, totaling nearly $178 per VMware share, as calculated.

Given that the majority of VMware shareholders are likely to select stock, those who opt for stock can expect a value of approximately $178 per share based on the current stock price. The distribution will be prorated, providing shareholders with roughly half stock and half cash for their VMware shares. Shareholders electing cash will receive $142.50 per share, while those who do not make an election will obtain a similar amount.

The value of $178 per share represents a significant premium of about $13 per share above the current VMware stock price. This premium largely stems from the uncertainty surrounding the approval of the transaction by Chinese regulators, as reported by takeover arbitragers. The spread between the merger price and VMware’s current market price stands at approximately 8%, which is substantial considering the deal is set to close in just over a month.

Roy Behren, co-manager of the Merger Fund, explains that the wide spread can be attributed to the opaque nature of the Chinese antitrust process and the immense size of the deal, which exceeds the capacity of the arbitrage community.

In conclusion, the impending merger between Broadcom and VMware requires careful consideration from shareholders. With the option of stock or cash, investors must align their choice with the potential value offered and the uncertainties associated with regulatory processes.

The Future of the VMware-Broadcom Deal

The Intel-Tower Semiconductor deal may have fallen through due to a lack of Chinese regulatory approval before the merger agreement expired, and now, U.S.-China tensions are causing uncertainty in the VMware arbitrage spread.

Despite these concerns, Wall Street remains confident that the deal will ultimately be successful, with odds of 75% or more. However, if the deal does not proceed as planned, experts predict that VMware’s trading range could fall between $125 and $135.

On the other hand, Broadcom is optimistic about the deal’s outcome. In a press release issued on August 21, the company assured that it intends to close the deal on October 30.

Broadcom has already received regulatory approvals from multiple countries and jurisdictions outside the U.S. Moreover, it believes there are no legal impediments to closing the deal under U.S. merger rules. The company is actively collaborating with regulators worldwide to secure any remaining necessary approvals before the targeted October 30 closing date.

When questioned about Chinese approval during an earnings conference call in August, Broadcom CEO Hock Tan did not provide a direct answer. Additionally, Broadcom did not respond to inquiries regarding the Chinese situation.

According to information provided in an election booklet, VMware states that the election deadline will be five business days before the anticipated closing date of the deal. The company expects that election forms will need to be submitted at least three business days prior to this deadline. Any updates regarding this information will be publicly disclosed by both companies.

For investors who hold their VMware shares through a bank or broker, VMware advises contacting their respective institution promptly for instructions on the procedures for making elections and exchanging shares of VMware common stock in the transaction.

Written by Andrew Bary

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