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Broadcom-VMware merger faces potential Chinese regulatory hurdles

EditorRachael Rajan
Published 18/10/2023, 05:00 am
© Reuters.
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Shares of Broadcom (NASDAQ:AVGO) and VMware (NYSE:NYSE:VMW) experienced a decline on Tuesday amid growing speculation that their proposed $61 billion merger could face obstacles from Chinese regulators. This news follows the U.S's stricter technology export restrictions on computer chips processing artificial intelligence software, which also contributed to a drop in Nvidia's (NASDAQ:NVDA) stock. Broadcom's shares fell by 3.3% to approximately $873, while VMware's shares dropped by 8% to $164.63.

Broadcom, a prominent player in the Semiconductors & Semiconductor Equipment industry, has been consistently increasing its earnings per share, and has raised its dividend for 13 consecutive years. This information, according to InvestingPro Tips, contributes to its high earnings quality, with free cash flow exceeding net income. Additionally, the company has been trading at a low P/E ratio relative to near-term earnings growth, which makes it an attractive investment.

On the other hand, VMware, a key player in the Software industry, has been showing a declining trend in earnings per share, despite its impressive gross profit margins. The company's stock generally trades with low price volatility, however, the current situation with the proposed merger has led to a significant drop in its stock price.

The anticipated merger between Broadcom and Palo Alto-based VMware, a provider of cloud computing management and networking software, is awaiting final approval from China. This approval is the concluding step in Broadcom's acquisition process, following clearance from U.K. antitrust regulators in August. Broadcom had previously estimated the completion of the deal by October 30.

In the proposed merger, Broadcom shareholders would own 88% of the combined company, with VMware shareholders owning the remaining 12%. While semiconductor products account for the majority of Broadcom's earnings, the company is also expanding into cloud computing management and networking software sectors. This move aligns with InvestingPro Tips that indicate a high return on invested capital for both companies.

Uncertainty around Chinese regulatory approval has led to a reversal in VMware's stock gains accumulated over several weeks due to rumors of imminent approval. The ongoing tech feud between the U.S and China, involving chip export restrictions and China's use of its antimonopoly powers to block U.S acquisitions such as MaxLinear's Silicon Motion (NASDAQ:SIMO) Technology bid and Intel (NASDAQ:INTC)'s Tower Semiconductor (NASDAQ:TSEM) acquisition attempt, has amplified this uncertainty.

Broadcom had proposed an average buyout price of about $185 per share for VMware stock, just 3% above Monday's closing price. The proposed purchase price was either $142.50 in cash or 0.252 shares of Broadcom stock (valued at $902 per share) for each VMware share. This arrangement was prorated to ensure half payment in cash and half in stock. A decrease in Broadcom's stock value, such as the 12.5% drop witnessed in September, could further reduce the average buyout price, raising additional concerns for VMware investors.

For more insights on these companies, investors can access additional InvestingPro Tips by subscribing to their Pro service here.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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