Broadcom confident VMware deal to close despite China review
BROADCOM and software maker VMware said their US$61 billion merger is on track to close before a November deadline, working to reassure investors while China drags out its review of the deal.
The companies did not say in a joint statement on Monday (Oct 30) how close they might be to approval from Chinese regulators – the last major hurdle to completing the deal. But they said there’s “no legal impediment” to closing under US merger regulations. The agreement between the companies expires on Nov 26. They had maintained until last month that they expected to close by Oct 30.
The combination of the US chipmaker and cloud software company, one of the biggest technology mergers ever, could become the latest casualty of an escalating fight between the US and China for tech dominance. Washington recently tightened export restrictions aimed at blocking China’s access to high-performing semiconductors. Meanwhile, there are signs that a new smartphone developed by China’s Huawei Technologies using an advanced chip is eating into the sales of Apple’s iPhone 15 series.
Chinese regulators have tanked several large merger deals in recent years by dragging their feet on approvals, which are required because the country is the world’s biggest buyer of many products, including semiconductors. In the most recent example, Intel dropped its US$5.4 billion attempt to acquire Tower Semiconductor after failing to secure a nod in time.
Last year, DuPont de Nemours scuttled a proposed US$5.2 billion acquisition of Rogers after failing to get timely clearance from Beijing. In 2018, US-based Qualcomm scrapped a US$44 billion bid for Dutch chipmaker NXP Semiconductors after a drawn-out review by China’s State Administration for Market Regulation.
Broadcom and VMware pointed out in their statement on Monday that the deal has already received legal clearance in other major markets, including the EU, UK, South Korea and Japan. The Financial Times had previously reported that antitrust regulators in China may take longer to approve the combination given a tightening of US chip sanctions, sending shares of VMWare below the offer price.
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VMWare shares were trading at US$142.25 midday on Monday in New York. Under the deal terms, shareholders could choose to receive either US$142.50 in cash or 0.252 shares of Broadcom stock for each VMware share. About 96 per cent of shareholders elected to receive the stock consideration, according to the statement. Broadcom shares were down 1.1 per cent to US$828.88.
For the investor community, the company’s statement “was about as positive as we could expect absent deal close this morning”, said Cabot Henderson, a merger arbitrage strategist at JonesTrading, “although one can never feel completely confident given China approval is something of a black box”.
Failing to win approval from China could pose a significant setback for San Jose, California-based Broadcom, which derives about 35 per cent of its revenue from the country. If the merger is terminated because the takeover does not gain regulatory approvals in time, Broadcom may be on the hook for a US$1.5 billion termination fee under the terms of the agreement.
Broadcom chief executive officer Hock Tan aims to turn VMware into the centrepiece of his software operations after previously purchasing CA Technologies and Symantec’s corporate security business. VMware, founded in 1998, pioneered so-called virtualization programs, which consolidated applications and workloads on a smaller number of server computers. The innovation made it easier for servers to handle more than one program.
Failure to win approval from China would also mark the second time Broadcom has been ensnared by US-China tensions. In 2018, former President Donald Trump blocked Broadcom’s hostile US$117 billion takeover of Qualcomm, scuttling a deal that had been scrutinised over a potential threat to US national security. Trump’s order came as Broadcom was in the midst of moving its headquarters from Singapore to the US.
VMware agreed to the takeover in May 2022, setting a record for an acquisition by a chipmaker. The largest previous purchase was Advanced Micro Devices’s US$34.1 billion takeover of Xilinx. The deal included a so-called go-shop clause, which let VMware solicit competing offers, but no other suitors emerged.
The VMware transaction was part of a flurry of dealmaking in 2022. Microsoft agreed in January to buy video game publisher Activision Blizzard for US$69 billion. A consortium backed by Vista Equity Partners set out to acquire software maker Citrix Systems for US$13 billion, and Elon Musk announced a US$44 billion buyout of Twitter in April. Those deals have all now closed. BLOOMBERG
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