VMware
shares now are discounting about a 50% chance that the company’s $75 billion-plus merger with
Broadcom
will get completed, down from about a 90% likelihood on Monday, Barron’s estimates.
VMware shares (Ticker VMW) fell 9.6% Thursday to $150.31 in the wake of an article Thursday in the Financial Times that the Chinese State Administration of Market Regulation is likely to delay signing off on the deal and there will likely be additional consultations with Chinese government authorities. The FT cited people familiar with the matter.
Investors are worried that rising U.S./China trade and diplomatic tensions could scuttle the deal, which is believed to need Chinese regulatory approval. It’s very hard for U.S. investors to gauge the opaque Chinese antitrust process with many calling it a “black box.”
A VMware spokesperson told Barron’s late Thursday that, “We continue to expect the deal to close on Oct. 30, 2023.”
VMware stock ended Thursday about $30 a share below the current value of the Broadcom (AVGO) cash-and-stock offer which was worth about $180 a share on Thursday close, Barron’s calculates. Broadcom stock was off 2.2% Thursday to $867.83. VMW holders have the option of getting 0.252 shares of Broadcom for each of their shares or $142.50 in cash.
To figure out the implied odds of the deal closing, investors estimate where VMware would trade if the deal gets scrapped. That figure appears to be around $120 a share. With investors standing to make about $30 if the deal happens or lose $30 if it doesn’t, the implied odds are around 50%. The odds were about 90% on Monday when VMware closed at $179.
Roy Behren, a co-manager of the Merger Fund, thinks the risk/reward ratio in VMware is favorable. He calculated earlier Thursday that the implied odds were about 46% of the deal getting done. “We think the probability (of the deal closing) as we sit here is higher.”
The VMware merger consideration is complicated because Broadcom is capping the more valuable stock consideration of the deal at 50% of the total VMware shares outstanding. The stock portion is up sharply in value since the deal was unveiled in May 2022 due to the run-up in Broadcom stock.
Traders calculate the value of the deal by taking 50% of the current value of the stock portion of the deal and adding that to 50% of the cash consideration of $142.50. That total is now around $180 a share, we estimate.
Broadcom and VMware said Wednesday that VMware holders would have until Oct. 23 to make their election of stock or cash. Investors should choose the stock option, traders say, because it’s worth so much more than the cash option. Those choosing stock likely will be prorated and get roughly 50% stock and 50% cash.
The announcement Wednesday about the election deadline was a sign of confidence by the two companies that they felt the deal was on track for closing on Oct. 30.
Write to Andrew Bary at andrew.bary@barrons.com
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