VMware-Broadcom merger: VMWare holders will get a windfall

There was concern that it was a cash and stock deal Baron It is estimated that $83 billion could die without China’s approval due to trade and economic tensions between the United States and China.

It turns out that waiting for China to approve the deal was worth it. The vast majority of VMware (ticker: VMW) shareholders will receive a windfall thanks to the surge in Broadcom (AVGO) shares since the deal was announced. Broadcom is a manufacturer of chips and devices. VMware produces software.

the Tuesday approval From China’s State Administration for Market Regulation (SAMR) final regulatory approval was necessary for the deal.

Wall Street assumed that Broadcom, which does significant business in China, would not close the deal without China’s approval. Many American investors view China’s regulatory process as arcane and unpredictable. There is also a felt political overlay.

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VMware investors have been in an almost unprecedented state of limbo without access to their shares since the merger consideration election period ended on October 23, a period of more than four weeks.

The two companies had planned to close the deal on October 30. On that date, they issued a statement saying they expected to close the deal “soon,” ahead of the November 26 merger closing date. The deal will close shortly. Under the wire.

VMware stock fell on news of the approval, falling 5% to close at $142.48 on Tuesday. Broadcom fell 1.5% to $981.20.

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VMware’s decline reflects strange dynamics in the stock. New purchasers of VMware, and any other purchasers since the merger consideration period expired on October 23, will receive cash consideration of $142.50 per share.

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However, some investors have been buying VMware stock betting that if the merger is delayed beyond the November 26 termination date, the election period may reopen, enabling investors to get partial money in the election of more valuable shares.

About 96% of VMware holders elected to receive stock in the merger election period and will receive a package of stock and cash worth about $197 per share, Baron Estimates.

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VMware holders had the option to receive 0.252 Broadcom shares for each VMware share or $142.50 per share in cash. With Broadcom shares soaring since the deal was announced, the stock election was worth even more. Broadcom stock has been on a boom, up more than 10% this month and more than 75% since the deal was announced in May 2022. However, Broadcom is capping the stock price at 50% of VMware shares.

This means that VMware holders who elect to receive stock will be split pro rata and will receive 52% stock and 48% cash, according to the Oct. 30 press release.

If the deal expires, VMware stock could fall to the $120 to $130 range.

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The deal was popular with merger arbitrators because it was widely reported throughout most of the year due to concerns about Chinese regulatory approval. Arbs bought VMware and shorted Broadcom to secure a 10% margin through most of 2023.

“This approval is beneficial to the broader global M&A industry,” Roy Perrin, co-manager of the Merger Fund, wrote in a letter to Reuters. Baron In an email message.

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“Although the Chinese regulatory process is often opaque, we have seen several recent deals, including in the technology sector, approved by SAMR after a comprehensive review. Most of the large acquisitions we have seen recently, both within “U.S. or abroad, does enough business in China to require antitrust approval by SAMR, its regulatory agency.”

Behren’s Westchester Capital owned about $230 million of VMware and was one of the largest positions in the merger fund on Sept. 30.

There was concern that the Broadcom-VMware deal would suffer the same fate as Intel
‘s

(INTC) buy deal

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Tower Semiconductor (TSEM), which was canceled in the summer after failing to receive Chinese antitrust approval.

If China rejects a merger, it generally refuses to approve it rather than outright rejects it. But not agreeing is tantamount to rejection.

The situation between Broadcom and VMware highlights the growing Chinese risks in the business. Investors need to consider the relationship between the United States and China, beyond traditional regulatory considerations. The upside is that spreads – the difference between where the stock traded and the transaction price – will be wider, creating more opportunities for profits.

From an antitrust perspective, the deal did not raise any major issues since there was no overlap between the two companies. In approving the deal, Chinese regulators attached certain conditions including a prohibition on unjustifiably linking the sale of Broadcom and VMware products. Broadcom appears to have been aware of these terms in advance since it made an announcement that the deal would close quickly on Wednesday following SAMR approval.

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The Financial Times reported that the delay in Chinese approval was political. Investors had hoped that the Chinese leader’s visit to the United States last week would be a catalyst and lead to China approving the deal. It is not clear whether Xi’s visit played any role in the decision.

Broadcom CEO Hock Tan was one of several US CEOs, including Apple CEO Tim Cook, who attended a dinner with Xi last week in San Francisco, according to media reports. Approval of the deal represents a coup for Tan, who said he expected approval.

Write to Andrew Barry at [email protected]

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