There have been concerns that the cash-and-stock deal, which Barron estimates is worth $83 billion, could fall apart without China’s approval due to trade and economic tensions between the U.S. and China.
It turns out that China’s approval of the deal was worth the wait. The vast majority of VMware (ticker: VMW) shareholders stand to make a profit thanks to the rise in Broadcom stock (AVGO) since the deal was announced. Broadcom is a chip and hardware company; VMware produces software.
Approval from China’s State Market Regulatory Administration (SAMR) on Tuesday was the final regulatory OK required for the transaction.
Wall Street assumed that Broadcom, which has significant business in China, would not complete the deal without China’s approval. China’s regulatory process is viewed by many American investors as opaque and unpredictable. There is also a perceived political overlay.
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VMware investors have been in almost unprecedented limbo without access to their shares since the merger consideration period ended Oct. 23, a period of more than four weeks.
The two companies had planned to close the deal on October 30. That day, they released a statement saying they expected to complete the deal “soon,” ahead of the merger completion date of November 26. The deal will be completed shortly under the cable.
VMware shares fell 5% on the regulatory news, closing at $142.48 on Tuesday. Broadcom fell 1.5% to $981.20.
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The decline in VMware reflected a strange dynamic in the stock. Current buyers of VMware and those since the end of the merger consideration period on October 23 are entitled to a cash consideration of $142.50 per share.
However, some investors bought VMware shares, betting that if the merger was delayed beyond the Nov. 26 termination date, the voting period might be reopened, allowing investors to get partially paid in higher-value stock picks.
About 96% of VMware holders elected to receive stock during the merger election period, receiving a package of stock and cash worth about $197 per share, according to Barron’s estimates.
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VMware holders had the choice of receiving 0.252 shares of Broadcom stock or $142.50 per share in cash for each VMware share. Given the rise in Broadcom stock since the deal was announced, the stock pick was worth a lot more. Broadcom shares are on the rise, up more than 10% this month and over 75% since the deal was announced in May 2022. However, Broadcom caps the share price at 50% of VMware shares.
That means VMware holders who elect to receive shares will be split pro rata, receiving 52% stock and 48% cash, the Oct. 30 press release said.
Had the deal fallen through, VMware stock could have fallen into the $120 to $130 range.
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The deal was popular with merger arbitrageurs as deals were spread out over much of the year due to concerns over approval from Chinese regulators. Arbs bought VMware and shorted Broadcom to lock in a spread that was above 10% for much of 2023.
“This approval is good for the broader global mergers and acquisitions industry,” Roy Behren, the merger fund’s co-manager, wrote in an email to Barron’s.
“Although the Chinese regulatory process is often opaque, we have recently seen many deals, including in the technology sector, approved by SAMR after a thorough review. “Most of the large acquisitions we have seen recently, both inside and outside the U.S., are doing so much business in China that they require antitrust approval from regulator SAMR,” Behren said.
Behren’s firm, Westchester Capital, held about $230 million in VMware as of Sept. 30, one of the larger positions in the merger fund.
There were concerns that the Broadcom-VMware deal would suffer the same fate as the Intel (INTC) purchase agreement.
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Tower Semiconductor (TSEM), which was abandoned in the summer after failing to receive Chinese antitrust approval.
When China opposes a merger, it typically withholds approval rather than rejecting it outright. But the lack of consent is tantamount to rejection.
The situation between Broadcom and VMware highlights the growing China risk in the business. Investors must also consider the US-China relationship in addition to traditional regulatory considerations. The advantage is that spreads – the difference between where a stock is traded and the trading price – become wider, creating more opportunities for profit.
From an antitrust perspective, the deal did not pose any major problems as there was no overlap between the two companies. In approving the deal, Chinese regulators attached certain conditions, including a ban on tying sales of Broadcom and VMware products without justification. Broadcom appeared to have known these terms in advance, as it announced the deal would close quickly after SAMR approval on Wednesday.
The Financial Times had reported that the delay in Chinese approval was political. Investors were hoping that the Chinese leader’s visit to the US last week could be a catalyst and lead to China’s approval of the deal. It is not clear whether Xi’s visit played a role in the decision.
According to media reports, Broadcom CEO Hock Tan was one of many US CEOs, including Apple CEO Tim Cook, who attended a dinner with Xi in San Francisco last week. Approval of the deal represents a coup for Tan, who had said he expected the OK.
Write to Andrew Bary at [email protected]