Merger Arbitrage Mondays: Broadcom To Acquire VMware For $69 Billion

Summary

  • One of the largest tech deals in M&A history was announced last week.
  • Chipmaker Broadcom entered into an agreement to acquire VMware for $69 billion in a cash or stock deal.
  • Broadcom's acquisition of VMware will be reviewed by either the FTC or the DOJ, the Committee on Foreign Investment in the United States (CFIUS), and multiple international regulatory agencies.
  • Looking for more investing ideas like this one? Get them exclusively at Inside Arbitrage. Learn More »

The VMware campus in Silicon Valley

Sundry Photography/iStock Editorial via Getty Images

Merger activity increased significantly last week with seven new deals announced and six deals completed. Three of the seven new deals announced were potential deals in the works.

One of the largest tech deals in M&A history was announced last week. Chipmaker Broadcom entered into an agreement to acquire VMware (NYSE:VMW) for $69 billion in a cash or stock deal, which includes $8 billion of VMware's net debt, that will be assumed by Broadcom. VMware was spun off from Dell Technologies (DELL) on November 1, 2021. VMware was founded in the year 1998 and later acquired by EMC in January 2004 and eventually ended up with Dell after EMC was acquired by Dell in a massive $67 billion deal in 2016.

We added VMware as a potential deal in the works on May 22, 2022, when Bloomberg reported that Broadcom (AVGO) was in talks to acquire VMware. VMW's price after this announcement was $119.43. When I first heard rumors of the deal, I dismissed it because of both the size of the deal and the likely regulatory challenges a deal with Broadcom would encounter. Broadcom's highly acquisitive CEO Hock Tan was blocked from acquiring Qualcomm (QCOM) in a hostile $117 billion takeover when President Trump prohibited the deal on national security grounds. Broadcom's acquisition of VMware will be reviewed by either the FTC or the DOJ, the Committee on Foreign Investment in the United States (CFIUS) and multiple international regulatory agencies including China's State Administration for Market Regulation (SAMR).

According to the terms of the deal, VMware shareholders will be able to elect to receive either $142.50 in cash or 0.2520 shares of Broadcom common stock for each VMware share. The shareholder election will be subject to proration, resulting in approximately 50% of VMware's shares being exchanged for cash consideration and 50% being exchanged for Broadcom common stock. The deal also includes a 40 day "go-shop" provision during which VMware can solicit alternative proposals.

Michael Dell and Silver Lake, who own 40.2% and 10% of VMW, respectively, agreed to vote in favor of the transaction. According to the press release, both parties have agreed to a $1.5 billion termination fee, but VMware will only have to pay $750 million if it finds a superior offer by the July 5 deadline. The deal is expected to be completed in Broadcom's fiscal year 2023. After the closing of the deal, the Broadcom Software Group will rebrand and operate as VMware.

Broadcom and VMware

Broadcom and VMware (Broadcom VMware presentation)

SPAC Arbitrage

There were four new SPAC combinations announced last week.

  1. On May 25, 2022, privately held Southland Holdings and Legato Merger Corp. II (LGTO) jointly announced that they have signed a definitive agreement for a business combination transaction.
  2. On May 26, 2022, ECARX Holdings has entered into a merger agreement with COVA Acquisition (COVA) and upon completion of the transaction expects to be listed on Nasdaq under ticker symbol "ECX".
  3. On May 26, 2922, Auto Services Group Limited entered into a definitive merger agreement for a business combination with Goldenbridge Acquisition Limited (GBRG).
  4. On May 27, 2022, Aesther Healthcare Acquisition (AEHA) announced that it has entered into an Agreement and Plan of Merger with United Gear & Assembly.

Weekly Spread Changes:

The table below shows weekly spread changes between May 20 and May 29, 2022.

Symbol Quote Acquiring Company Acquiring Company Quote Current Spread Last Week Spread Spread Change Weekly Deal Type
(BKI) 68.68 Intercontinental Exchange, Inc. (ICE) 102.7 23.76% 18.12% 5.64% Special Conditions
(SAVE) 20.5 Frontier Group Holdings, Inc. (ULCC) 10.455 7.93% 3.88% 4.05% Cash Plus Stock
(PTRS) 9.18 OceanFirst Financial Corp. (OCFC) 19.87 -2.34% -4.35% 2.01% All Stock
(EXTN) 6.08 Enerflex Ltd. (ENRFF) 7.92 4.53% 3.46% 1.07% All Stock
(UMPQ) 17.77 Columbia Banking System, Inc. (COLB) 30.35 1.76% 1.40% 0.36% All Stock
(TSEM) 48.25 Intel Corporation (INTC) 44.55 9.84% 16.00% -6.16% All Cash
(BLCT) 1.34 Multelements Limited (N/A) 19.40% 25.98% -6.58% All Cash
(TWTR) 40.17 Elon Musk (N/A) 34.93% 41.55% -6.62% All Cash
(TEN) 16.96 Apollo Global Management, Inc. (APO) 60.32 17.92% 25.00% -7.08% All Cash
(MGI) 10.01 Madison Dearborn Partners, LLC (N/A) 9.89% 17.27% -7.38% All Cash

Deal Statistics:

Total Number of Deals Closed in 2022 77
Total Number of Deals Not Completed in 2022 5
Total Number of Pending Deals
Cash Deals 56
Stock Deals 13
Stock & Cash Deals 9
Special Conditions 7
Total Number of Pending Deals 85
Aggregate Deal Consideration $915.53 billion

New Deals:

  1. The acquisition of Entasis Therapeutics Holdings (ETTX) by Innoviva (INVA) for $87.32 million or $2.20 per share in cash.
  2. The acquisition of CynergisTek (CTEK) by Clearwater Compliance for $13.9 million or $1.25 per share in cash.
  3. The acquisition of PCSB Financial Corporation (PCSB) by Brookline Bancorp (BRKL) for a closing value of $313 million in a cash or stock deal. Under the terms of the merger agreement, stockholders of PCSB will receive, for each share of PCSB, at the holder's election, either $22.00 in cash consideration or 1.3284 shares of Brookline common stock for each share of PCSB common stock, subject to allocation procedures to ensure 60% of the outstanding shares of PCSB common stock will be converted to Brookline common stock.
  4. The acquisition of Covetrus (CVET) by Clayton, Dubilier & Rice and TPG Capital for $4 billion or $21 per share in cash. We added CVET as a potential deal to the Deals in the Works section on February 3, 2022, and the price after the news of the potential deal came out was $19.71.
  5. The acquisition of Höegh LNG Partners (HMLP) by Höegh LNG Holdings for $167.6 million or $9.25 per share in cash. We added HMLP as a potential deal to the Deals in the Works section on December 6, 2021, and the price after the news of the potential deal came out was $4.26.
  6. The acquisition of StoneMor (STON) by Axar Capital Management for $927.7 million or $3.50 per share in cash.
  7. The acquisition of VMware (VMW) by Broadcom (AVGO) for $69 billion in a cash or stock deal. The closing value includes $8 billion of VMware's net debt, that will be assumed by Broadcom. Under the terms of the agreement, VMware shareholders will elect to receive either $142.50 in cash or 0.2520 shares of Broadcom common stock for each VMware share. The shareholder election will be subject to proration, resulting in approximately 50% of VMware's shares being exchanged for cash consideration and 50% being exchanged for Broadcom common stock. We added VMW as a potential deal to the Deals in the Works section on May 22, 2022, and the price after the news of the potential deal came out was $119.43.

Deal Updates:

  1. On May 23, 2022, Fulton Financial Corporation (FULT) announced that both the Federal Reserve Bank of Philadelphia and the Pennsylvania Department of Banking and Securities have approved the respective applications by Fulton to acquire Prudential Bancorp (PBIP).
  2. On May 23, 2022, MoneyGram International (MGI) announced that stockholders overwhelmingly approved the transaction with affiliates of funds managed by Madison Dearborn Partners.
  3. On May 23, 2022, Spirit Airlines (SAVE) announced that it will host a conference call for analysts to discuss the Spirit Board of Directors' decision to reject the unsolicited tender offer from JetBlue Airways Corporation (JBLU) and its recommendation that stockholders vote for the merger with Frontier Airlines (ULCC).
  4. On May 24, 2022, Allegiance Bancshares (ABTX) and CBTX, Inc. (CBTX) announced that their respective shareholders had approved the agreement for the merger of equals of Allegiance and CBTX.
  5. On May 25, 2022, Elon Musk revised the financing plan for his proposed $44 billion purchase of Twitter (TWTR) by eliminating the $6.25 billion margin loan and replacing it with an equity commitment, which will bring the stock-based portion of the deal to $33.5 billion.
  6. On May 25, 2022, Whiting Petroleum Corporation (WLL) announced that the special meeting of stockholders will be on June 28, 2022.
  7. On May 25, 2022, the HSR Waiting Period applicable to the consummation of the Merger between Datto Holding (MSP) and Kaseya expired.
  8. On May 25, 2022, PS Business Parks (PSB) announced the expiration of the "go-shop" period set forth in the previously announced definitive merger agreement with affiliates of Blackstone Real Estate (BX).
  9. On May 26, 2022, Meritor (MTOR) announced that its shareholders have voted to approve the previously announced pending acquisition by Cummins (CMI) at a special meeting.

Closed Deals:

  1. The acquisition of Zynga (ZNGA) by Take-Two Interactive Software (TTWO) on May 23, 2022. It took 133 days for this deal to be completed.
  2. The acquisition of Antares Pharma (ATRS) by Halozyme Therapeutics (HALO) on May 24, 2022. It took 41 days for this deal to be completed.
  3. The acquisition of IntriCon Corporation (IIN) by Altaris Capital Partners on May 24, 2022. It took 85 days for this deal to be completed.
  4. The acquisition of American National Group (ANAT) by Brookfield Asset Management Reinsurance Partners (BAMR) on May 25, 2022. It took 289 days for this deal to be completed.
  5. The acquisition of Vidler Water Resources (VWTR) by D.R. Horton (DHI) on May 25, 2022. It took 41 days for this deal to be completed.
  6. The acquisition of Ortho Clinical Diagnostics Holdings (OCDX) by QuidelOrtho Corporation (QDEL) on May 27, 2022. It took 155 days for this deal to be completed.

Top 10 deals with largest spreads:

Please do your own due diligence on deals with large spreads. Some of these large spreads might be related to regulatory issues or because of the way the deal is structured. We classify some of these deals as "special situation" deals in our merger arbitrage tool and provide additional details to help with the analysis. There may be unique situations related to special dividends, spinoffs, proration, etc. that need to be accounted for when looking at these spreads.

Symbol Announced Date Acquiring Company Closing Price Last Price Closing Date Profit Annualized Profit
(TWTR) 04/25/2022 Elon Musk (N/A) $54.20 $40.17 12/31/2022 34.93% 59.02%
(BKI) 05/04/2022 Intercontinental Exchange, Inc. (ICE) $85.00 $68.68 06/30/2023 23.76% 21.85%
(ATVI) 01/18/2022 Microsoft Corporation (MSFT) $95.00 $78.2 06/30/2023 21.48% 19.75%
(SIMO) 05/05/2022 MaxLinear, Inc. (MXL) $108.95 $90.5 06/30/2023 20.39% 18.74%
(BLCT) 04/30/2022 Multelements Limited (N/A) $1.60 $1.34 12/31/2022 19.40% 32.79%
(TEN) 02/23/2022 Apollo Global Management, Inc. (APO) $20.00 $16.96 12/31/2022 17.92% 30.29%
(CHNG) 01/06/2021 UnitedHealth Group Incorporated (UNH) $27.75 $23.8 12/31/2022 16.60% 28.05%
(SJR) 03/15/2021 Rogers Communications Inc. (RCI) $32.40 $28.3 06/30/2022 14.49% 165.25%
(BRG) 12/20/2021 Blackstone Real Estate (N/A) $29.85 $26.49 06/30/2022 12.68% 144.68%
(MBII) 03/16/2022 Bioceres Crop Solutions Corp. (BIOX) $1.27 $1.13 09/30/2022 12.45% 36.66%

Conclusion:

Spreads compressed last week as overall sentiment turned more optimistic and indices rebounded. We also saw several deals close faster than anticipated with both Antares Pharma and Vidler Water Resources closing in just 41 days. Vidler started out with a negative spread as investors held out hope for a higher offer. For the second week in a row, no SPAC IPOs were filed.

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This article was written by

Asif Suria profile picture
9.64K Followers
Comprehensive tools and detailed analysis for event-driven investors

I am an entrepreneur and investor with a focus on event driven strategies including merger arbitrage, spinoffs, (legal) insider trading, buybacks and SPACs. I was one of the earliest contributors on Seeking Alpha and started publishing here in 2005. For more than a decade I have been writing every week about M&A and interesting insider transactions. My work has been mentioned in Barron's, Dow Jones, BNN Bloomberg and other publications.  

I have been an active investor for more than two decades and my background in technology has helped me built tools that inform my investing process, especially as it relates to event-driven strategies that require updated data and processes. The focus on my Inside Arbitrage service is to provide investors with the right combination of tools and analysis to help them take advantage of strategies that can perform well across market cycles.  

Disclosure: I/we have a beneficial long position in the shares of BHVN, TWTR, FHN, TSEM, HTA, TGNA, BRG either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: I have long positions in Biohaven Pharmaceutical (BHVN), Twitter (TWTR), First Horizon (FHN), Tower Semiconductor (TSEM), Healthcare Trust of America (HTA), TEGNA (TGNA) and Bluerock Residential Growth REIT (BRG). Please do your own due diligence before buying or selling any securities mentioned in this article. We do not warrant the completeness or accuracy of the content or data provided in this article.

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