Why VMWare Stock Surged 30% Last Week

What happened

Shares of a cloud computing infrastructure company VMWare (VMW 3.17%) are up 30% in the past week as of Thursday afternoon, according to data from S&P Global Market Intelligence. That’s because rumors from the semiconductor giant Broadcom (AVGO 3.58%) brokering a deal turned out to be true. If Broadcom is successful, VMWare will have a new home some 15 years after being partially spun off from EMC in 2007. EMC is now part of Dell Technologies (DELL 1.46%)which finished divesting its stake in VMWare in 2021.

Image source: Getty Images.

So what

Broadcom is offering VMWare shareholders an option to take either $142.50 in cash for each share they own, or 0.252 shares of Broadcom stock. As of Thursday night’s market close, the stock was worth nearly $139 ($550.60 per share for Broadcom multiplied by 0.252).

The total price for Broadcom would be $61 billion. VMWare’s board has a “go-shop” period that lasts until July 5 during which it can solicit and evaluate competing bids. Given that this is one of the biggest acquisitions ever in the tech sector, there are likely only a limited number of suitors who could (or would) match or beat the offer. from Broadcom.

Broadcom has been a serial acquirer of infrastructure software companies in recent years to supplement its chip design empire. Adding VMWare’s cloud infrastructure and application platform would add further vertical integration for Broadcom. It would also add a bunch of fresh cash flow to what is already a cash-generating machine. Broadcom generated more than $14.4 billion in free cash flow in the past 12 months. It expects the addition of VMWare to add an additional $8.5 billion to earnings before interest, taxes, depreciation and amortization (EBITDA) within three years of the deal being finalized.

Now what

This acquisition is not without risks. Broadcom is already heavily leveraged with $39.2 billion in long-term debt from its previous takeovers. If successful, Broadcom would also assume an additional $8 billion of VMWare’s debt (net of cash and cash equivalents). To pay for the cash component of the offer, Broadcom secured $32 billion in funding, so there is another huge debt that would be added to the balance sheet.

And of course, there’s antitrust regulatory scrutiny that could put the kibosh on this merger as well. Broadcom has extensive reach with its semiconductor portfolio, and VMWare has always been a technology-agnostic player. I expect Broadcom to face significant hurdles in getting a purchase approved, especially in the US, Europe and China. Stay tuned for more details.

About Barbara J. Ross

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