VMware Shares Discounting Probability of Successful Merger
According to estimates, VMware shares (Ticker VMW) now reflect a roughly 50% chance of the company’s merger with Broadcom, valued at over $75 billion, being completed. This is a significant decrease from the previously estimated likelihood of 90%.
Concerns over Chinese Regulatory Approval
Investors are apprehensive about the potential impact of escalating trade tensions between the United States and China on the deal. The need for Chinese regulatory approval adds complexity, as the country’s antitrust process is often seen as opaque and difficult to predict.
VMware Remains Optimistic
A spokesperson for VMware expressed confidence that the merger will proceed as planned, stating that they “continue to expect the deal to close on Oct. 30, 2023.”
Market Impact
As a result of the uncertainty surrounding the merger, VMware stock currently sits $30 below the value of the cash-and-stock offer made by Broadcom (AVGO). The offer stood at approximately $180 per share at the close of Thursday’s trading session. On the same day, Broadcom’s stock experienced a 2.2% decline, reaching $867.83. Shareholders of VMW have the option to receive either 0.252 shares of Broadcom or $142.50 in cash for each of their shares.
Implications of Deal Closure in VMware
Investors are closely analyzing the implied odds of the deal closing in VMware. To determine these odds, they consider the potential trade value of VMware if the deal falls through, which is estimated to be around $120 per share. Currently, investors stand to either gain about $30 if the deal succeeds or lose the same amount if it fails, resulting in implied odds of approximately 50%. This is a significant shift from Monday’s odds, which were as high as 90% when VMware closed at $179.
Roy Behren, co-manager of the Merger Fund, believes that the risk/reward ratio in VMware is favorable. Behren calculated earlier on Thursday that the implied odds were approximately 46% for the deal’s successful completion. Thus, he expresses confidence in a higher probability of the deal closing.
The complexity of the VMware merger consideration arises from Broadcom’s decision to cap the more valuable stock component at 50% of the total outstanding VMware shares. The value of the stock portion has significantly increased since the deal was announced in May 2022 due to a surge in Broadcom stock.
Traders assess the deal’s value by taking 50% of the current stock portion’s value and adding it to 50% of the cash consideration, which amounts to $142.50. As per our estimation, this combined value now stands at around $180 per share.
In an announcement on Wednesday, Broadcom and VMware specified that VMware shareholders would have until October 23rd to decide between stock or cash for their election. Traders strongly recommend choosing the stock option, as it holds much greater value compared to the cash option. Those who opt for stock are likely to receive a combination of approximately 50% stock and 50% cash, which will be prorated accordingly.
Election Deadline Confirms Confidence in Deal
The recent announcement on Wednesday regarding the election deadline signifies a strong belief from the two companies that the deal is firmly on track for closure by October 30th.
