By There has been an interesting development in the trading of VMware shares recently. Despite the stock’s decline, it has been changing hands at a price higher than the cash value offered by Broadcom for the software company.
Extended Stock Election Period
Investors seem to be speculating that the stock election period for VMware investors, which officially ended on Monday, might be extended.
The original plan was for the transaction between the two companies to be finalized on October 30th. However, there are potential antitrust issues in China that could cause a delay or even jeopardize the deal.
Possibility of Reopening Election Period
The prevailing belief on Wall Street is that if the closing of the deal is significantly delayed, both companies might reopen the election period. This would provide investors with another opportunity to choose the more valuable stock consideration option.
Share Performance
On Tuesday, VMW shares (ticker VMW) experienced a 3.6% decline, settling at $150.25. Despite this drop, the share price remained above the $142.50 per share value offered by Broadcom (AVGO). In contrast, Broadcom’s stock was up 2.1% to $880.64.
Background and Choice Offered
Let’s delve into the complex background of this situation. When Broadcom announced its acquisition of VMware in May 2022, it proposed a deal worth approximately $70 billion. As part of this offer, VMware shareholders were given the choice between receiving Broadcom stock (0.252 shares of Broadcom for each VMware share) or $142.50 in cash.
Originally, the value of both options was roughly equal. However, with Broadcom’s stock soaring more than 60% since the announcement, the stock portion has become much more valuable.
Broadcom capped the value of the stock portion at 50% of VMware shares. As a result, investors anticipated a 50% cash and 50% stock split as consideration for the deal.
On Monday, the stock election was valued at around $217 per VMware share (0.252 multiplied by $862), well above the cash option of $142.50. The overall value of the deal (50% cash and 50% stock) was approximately $180 per share.
However, anyone who purchased VMware shares on Tuesday would most likely be eligible for the cash option, receiving $142.50 per share.
So why are VMware shares still trading above this level?
Broadcom/VMware Deal Faces Uncertainty Amidst Chinese Approval Delay
Investors are growing concerned as they fear that deteriorating U.S./China relations may impact the success of the deal. Intel’s failed purchase of Tower Semiconductor earlier this year due to China’s non-approval serves as a reminder of these potential challenges.
The companies initially announced the deal to close on Oct. 30, however, concerns regarding Chinese approval have raised doubts. A spokesperson from VMware reiterated their intention to close the deal as scheduled, while Broadcom media contacts did not respond to requests for comment.
An arbitrager expressed their concern that sticking with the original election deadline would be unfair if China continues to withhold approval indefinitely. Making an election involves submitting shares to the exchange agent, which then restricts the ability to sell them. Although extending an election deadline is uncommon, freezing $70 billion in VMware stock while awaiting regulatory approval could create problems.
The resolution to these uncertainties lies in whether Broadcom and VMware receive the Chinese approval they are seeking. Until then, trading in VMware stock is expected to be volatile as investors assess the chances of the deal going through and a potential reopening of the election period.
On Tuesday, trading in VMware stock was relatively light, reflecting the majority of investors having already made their elections on Monday, leaving a small amount of stock available for trading.
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