VMware
shares gained over 3% Monday, in an apparent short squeeze, after
Broadcom
said its $70 billion merger with the software company would be delayed.
VMware shares (ticker: VMW) rose to $146.62, above the deal’s current value of $142.50 a share in cash. There is a very thin float in VMware of 4% or less of its roughly 432 million shares outstanding, making a stock more vulnerable to a short squeeze.
Broadcom (AVGO) stock was up 0.3% Monday to $841.25.
About 96% of VMware holders elected to receive Broadcom stock as merger consideration and those shares are effectively locked up until the deal closes—or collapses. Broadcom said early Monday it expects to close the deal soon, and before the termination date of Nov. 26.
Investors fear the deal could become a casualty of deteriorating relations between the U.S. and China. The situation is hard to assess, with many investors viewing China as a black box.
Broadcom CEO Hock Tan believes the delay in the closing, which had been planned for Monday, is related to bureaucratic issues and not political problems. The Financial Times has reported the delay is political.
With the election period for VMware holders having ended on Oct. 23, current buyers of VMware stock are entitled to receive $142.50 in cash. Some investors hoped the election period could be extended, but that seems unlikely if the closing happens soon.
Those who elected Broadcom stock should get a package of stock and cash worth about $178 a share, Barron’s has estimated. There is a proration since Broadcom is capping the stock election (0.252 shares of Broadcom for each VMware share) at 50% of the merger consideration.
Arbitragers say the current situation is unusual because VMware shares effectively are locked up now. They say it can be problematic if investors want redemptions.
Write to Andrew Bary at [email protected]
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