Broadcom, VMware Stocks Gain Despite Apparent Delay to Merger Closing

In a press release early Monday morning, the deal “will close soon, but in any event prior to the expiration of their merger agreement.” 

The merger agreement expires on Nov. 26, a Broadcom spokeswoman confirmed. Broadcom noted in a filing earlier this year that the deal had a termination date of Feb. 26, 2023, subject to “three extensions of three months each.” No mention of a specific termination date was made in the press release.

Broadcom and VMware did not acknowledge in their press release that Chinese regulatory approval is needed, but a Broadcom spokeswoman confirmed to Barron’s that the transaction only needs Chinese approval to proceed.

The Financial Times has reported that the deal has been held up as Chinese State Administration of Market Regulation seeks additional consultations with Chinese government authorities. Investors are worried that the deal might become a casualty of deteriorating U.S./China relations. Intel’s deal to buy Tower Semiconductor died in the summer after Intel couldn’t get Chinese approval.

The companies said in their press release that there are “no legal impediments to closing under U.S. merger regulations.

The latest news caps a very unusual period for a merger deal as Broadcom set a merger consideration election for VMware holders on Oct. 18 with a deadline of Oct. 23. In that press release, the two companies said they expected to close the deal on Oct. 30. It’s rare for a buyer in a merger deal to set an election without getting necessary regulatory approvals. 

The deal was originally reached in May 2022.

VMware holders had the option of electing Broadcom stock or cash. Barron’s has reported that the stock election was far more attractive and our assessment has proven right. The stock portion is more valuable due to the more than 50% gain in Broadcom stock since the deal was announced.

In the press release Monday, Broadcom said that holders of 96% of VMware shares elected to receive stock. As a result, VMware holders who elected stock are subject to a proration and will get about 52% stock and 48% cash. The current value of that package is about $178 per VMware share, based on Barron’s estimates. To reach that number, we multiplied Broadcom’s closing price of $838.36 Friday by the 0.252 Broadcom shares VMware stockholders would receive per share, which is about $211. We then multiplied $211 by 0.52 (the proration), and added the cash election of $142.50 multiplied by 0.48. The sum of those two figures is about $178.

Broadcom limited the stock component to 50% of the total consideration in the deal. About 4% of VMware holders elected cash or made no election. They will receive the cash consideration of $142.50 a share.

Any investor buying VMware now will receive the cash election and that’s why the stock traded down 2.9% to close to $142.20 on Friday, and is off another 1.7% in premarket trading Monday, to $139.81, amid concern the deal might not close. Broadcom stock was up 0.9%.

Some investors had speculated that with a potential merger delay, Broadcom would reopen the merger election but it has not done that. That would have provided a potential bonus to new investors in VMware.

VMware holders who made a merger consideration election now are effectively frozen until the deal closes or possibly falls apart. VMware investors who made an election in the deal can’t sell their stock, arbitragers tell Barron’s, meaning their investments are now tied up.

Write to Andrew Bary at [email protected]

–Jack Denton contributed to this article.