Broadcom-VMware Deal Gets China Approval. Why the Stocks Are Dropping.

In a press release Tuesday, the two companies said they “have received all required regulatory approvals and intend to close Broadcom’s acquisition of VMware on November 22, 2023.”

Shares of both Broadcom and VMware are lower in premarket trading. Broadcom stock was down 1.8% to $ 977.92 at 9:42 a.m. Tuesday, while VMware is off 4.7% to $142.93. 

VMware is lower because the merger consideration for current buyers of the stock is $142.50 in cash, according to risk arbitragers and Barron’s reading of Broadcom’s news releases and regulatory statements.

VMware stock had traded above that level recently as some investors bet that the merger election period could be reopened after ending on Oct. 23. A reopening could have allowed current buyers to get a price above $142.50 a share.

It’s not clear why Broadcom is lower in premarket trading. Broadcom will issue a sizable amount of stock to VMware holders under the terms of the deal. But arbitragers could be buyers of Broadcom as they unwind a popular trade in which they were long VMware and short Broadcom to capture the arb spread. Broadcom also has run up recently along with other chip companies, gaining more than 10% during November and hitting a record high in Monday’s session.

The news Tuesday that the merger will close Wednesday is a huge relief for VMware investors, including arbitragers who were betting on the deal’s success.

There had been concern that China might not approve the deal due to China/U.S. economic and trade tensions.

Broadcom and VMware have been waiting for an okay from China for several weeks. The merger had been expected to close on Oct. 30. When that didn’t happen, Broadcom issued a press release saying the deal was expected to close “soon” and before the termination date of the deal on Nov. 26. 

The overwhelming majority of VMware holders will get a windfall due to the rise of more than 75% in Broadcom stock since the merger was announced in May 2022.

VMware holders had the choice of electing to receive 0.252 shares of Broadcom for each VMware share or $142.50 a share in cash. With the run-up in Broadcom stock since the deal announcement, the stock election was worth much more, and about 96% of VMware holders elected to receive stock in the merger election period that ended on Oct. 23. Broadcom, however, is capping the stock consideration at 50% of the VMware shares. 

This means that VMware holders who elect to receive stock will be prorated and get 52% stock and 48% cash, according to the Oct. 30 press release. That package of stock and cash is worth about $195 per VMware share based on the premarket price of Broadcom stock, Barron’s estimate.

If the deal had died, VMware stock could have dropped into the $120 to $130 range.

VMware investors have been in limbo since the merger election period ended on Oct. 23 without access to their stock and unable to sell it. This put some financial strain on arbitragers who had to meet margin calls on short positions in Broadcom stock as it appreciated. 

The Broadcom/VMware deal was one of the most popular deals in the arb community with pros buying VMware and selling short Broadcom to lock in the spread.

There was concern that the Broadcom/VMware deal would meet the same fate as Intel’s deal to buy

Tower Semiconductor

which was scrapped in the summer after it didn’t get Chinese antitrust approval.

The FT had reported that the delay in Chinese approval was political amid continued tensions between China and the U.S. over trade and technology. 

Investors were hoping that the visit of China’s leader Xi Jinping to the U.S. last week might be a catalyst and lead to Chinese approval of the deal. It isn’t clear whether Xi’s visit played any role in the decision Tuesday. 

Broadcom CEO Hock Tan was reportedly one of many U.S. CEOs including

Apple

CEO Tim Cook who attended a dinner with Xi last week in San Francisco.

Write to editors@barrons.com