The impending acquisition of VMware (NYSE:VMW) Inc. by Broadcom (NASDAQ:AVGO) Inc. has reached a critical juncture as shareholders face a Monday deadline to decide their preferred mode of compensation - cash or shares in Broadcom. The decision triggers a lock-up period, barring them from selling shares until the acquisition is concluded.
VMware’s shares are expected to trade at around $142.50 on Tuesday, dropping from Monday’s $156.22, which implies that immediate selling could present higher returns than shorting a share on Tuesday. Broadcom aims to wrap up the transaction by Oct. 30, but the approval from Chinese regulators may be delayed due to US chip sanctions.
Aaron Glick from TD Cowen suggests that this lock-up period could be the reason behind VMware's recent share price decline. Shareholders have been given two options for their compensation: a cash payment or 0.252 shares of Broadcom common stock for each VMware share they hold. The latter option carries a 51% higher value than the cash payout. However, if an excessive number of investors opt for it, they will receive only half their payment in Broadcom equity.
According to InvestingPro's real-time metrics, VMware currently has a market cap of 67.31 billion USD and a P/E ratio of 46.72. The company's revenue stands at 13.61 billion USD, with a gross profit of 11.07 billion USD, indicating impressive gross profit margins, a point also highlighted by InvestingPro Tips. However, the company's stock has taken a significant hit over the last week, with a 1-week price total return of -15.64%.
In contrast, Broadcom is a prominent player in the Semiconductors & Semiconductor Equipment industry, with a market cap of 355.87 billion USD and a P/E ratio of 25.91. The company has consistently increased its earnings per share and has raised its dividend for 13 consecutive years. Its current revenue stands at 35.45 billion USD, with a gross profit of 26.33 billion USD. Despite the recent 1-week price total return of -5.42%, the company's stock has seen a high return over the last year, with a 1-year price total return of 94.85%.
InvestingPro Tips highlight that both companies have high earnings quality, with free cash flow exceeding net income. VMware, despite its declining trend in earnings per share, is still a prominent player in the Software industry and yields a high return on invested capital. Broadcom, on the other hand, has been showing a consistent increase in its earnings per share and is operating with a moderate level of debt.
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