Broadcom-VMware deal gets China’s approval. Why stocks are falling.

Broadcom plans to finalize its merger with VMware on Wednesday after obtaining conditional approval of the deal from China’s antitrust regulator on Tuesday.

China’s State Administration for Market Regulation, or SAMR, issued a statement Tuesday granting the conditional approval. It was the last global regulator that had to approve the deal, which Barron’s estimates are now put at over $80 billion. This would make this transaction one of the largest technology mergers ever.

In a press release Tuesday, the two companies said they “have received all required regulatory approvals and intend to complete Broadcom’s acquisition of VMware on November 22, 2023.”

Shares of Broadcom and VMware are down in premarket trading. Broadcom stock was down 1.8% at $977.92 as of 9:42 a.m. Tuesday, while VMware is down 4.7% at $142.93.

VMware is lower because the merger price for current buyers of the stock is $142.50 in cash, according to risk adjudicators and Barron’s reading of Broadcom’s press releases and regulatory filings.

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VMware stock has been trading above this level recently, with some investors betting that the merger election period could be reopened after ending on October 23. A reopening could have allowed current buyers to get a price above $142.50 per share.

It’s unclear why Broadcom is weaker in premarket trading. Broadcom will issue a significant amount of stock to VMware holders under the terms of the agreement. But arbitrageurs could become buyers of Broadcom as they unwind a popular trade in which they were long VMware and short Broadcom to capture the arb spread. Broadcom has also been rising recently, alongside other chip companies, gaining more than 10% in November and hitting a record high in Monday’s session.

Tuesday’s announcement that the merger will be finalized on Wednesday comes as a huge relief to VMware investors, including arbitrageurs who were betting on the deal’s success.

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There were concerns that China would not approve the deal due to economic and trade tensions between China and the United States.

Broadcom and VMware have been waiting for China’s agreement for several weeks. The merger was expected to be finalized on October 30. When that didn’t happen, Broadcom issued a press release saying the deal was expected to close “soon” and before the deal’s termination date of November 26.

The overwhelming majority of VMware holders will receive a windfall due to the more than 75% rise in Broadcom shares since the merger was announced in May 2022.

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VMware holders had the choice of receiving 0.252 Broadcom shares for each VMware share or $142.50 per share in cash. With Broadcom’s stock rising since the deal was announced, the stock election was worth significantly more, and approximately 96% of VMware holders elected to receive stock during the merger election period. which ended on October 23. Broadcom, however, caps the stock consideration at 50% of VMware stock.

This means that VMware holders who elect to receive stock will be prorated and will receive 52% stock and 48% cash, according to the Oct. 30 press release. This combination of stock and cash is worth approximately $195 per VMware share, based on the pre-market price of Broadcom stock, Barron’s estimate.

If the deal had fallen through, VMware stock could have fallen to between $120 and $130.

VMware investors have been in limbo since the merger election period ended on October 23, without access to their shares and unable to sell them. This put some financial pressure on arbitrageurs who had to respond to margin calls on short positions in Broadcom shares as they appreciated.

The Broadcom/VMware deal was one of the most popular deals in the arbitrage community, with professionals buying VMware and shorting Broadcom to lock in the spread.

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There were fears that the Broadcom/VMware deal would meet the same fate as Intel’s deal to buy Tower Semiconductor, which was abandoned this summer after failing to gain approval from Chinese antitrust authorities.

The FT had reported that the delay in Chinese approval was political, amid ongoing tensions between China and the United States over trade and technology.

Investors were hoping that Chinese leader Xi Jinping’s visit to the United States last week could be a catalyst and lead to Chinese approval of the deal. It is unclear whether Xi’s visit played a role in Tuesday’s decision.

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Broadcom CEO Hock Tan was reportedly one of several U.S. CEOs, including Apple CEO Tim Cook, who attended a dinner with Xi last week in San Francisco.

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