Broadcom-VMware deal wins China approval. Stocks are falling.

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

Shares of Broadcom and VMware are lower in premarket trading. Broadcom shares fell 1.8% to $977.92 as of 9:42 a.m. Tuesday, while VMware fell 4.7% to $142.93.

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

VMware stock had traded above that level recently as some investors bet that the merger election period could reopen after ending on October 23. A reopening could have allowed current buyers to obtain a price higher than $142.50 per share.

It’s unclear why Broadcom is down in premarket trading. Broadcom will issue a substantial number of shares to VMware holders under the terms of the deal. But arbitrageurs could be buyers of Broadcom as they unwind a popular trade in which they were long VMware and short Broadcom to capture the arbitrage spread. Broadcom has also risen recently along with other chip companies, gaining more than 10% during November and hitting a record high in Monday’s session.

Tuesday’s news that the merger will close on Wednesday comes as a big relief to VMware investors, including arbitrageurs who were banking on the deal’s success.

There were concerns that China might 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 approval for several weeks. The merger was expected to close 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 Nov. 26 termination date.

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

VMware holders had the option of choosing to receive 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 much more, with about 96% of VMware holders choosing to receive shares in the merger election period that ended on October 23. the equity consideration to 50% of VMware shares.

This means that VMware holders who opt to receive shares will be prorated and will get 52% shares and 48% cash, according to the Oct. 30 press release. That package of stock and cash is worth about $195 per VMware share based on Broadcom’s premarket stock price. Barron estimate.

If the deal had fallen through, VMware shares could have fallen by $120 to $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 meet margin requirements on short positions in Broadcom shares as they appreciated.

The deal between Broadcom and VMware was one of the most popular in the arb community, where professionals bought VMware and shorted Broadcom to lock in the spread.

There were concerns that the Broadcom/VMware deal would suffer the same fate as Intel’s deal to buy Tower Semiconductor, which was scrapped in the summer after it failed to win antitrust approval from China.

The Financial Times had reported that the delay in Chinese approval was political amid continuing tensions between China and the United States over trade and technology.

Investors had hoped 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 any role in Tuesday’s decision.

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

Write to editors@barrons.com