For more than a year, a planned merger deal has been a big factor driving price action for shares in VMware (NYSE:VMW). As you may recall, back in May 2022, Broadcom (NASDAQ:AVGO) announced plans to acquire all outstanding shares of VMW stock.
Required regulatory reviews have delayed the merger, as the transaction could give Broadcom tremendous competitive advantages. However, with the deal all but getting full regulatory approval, it appears set to close by year’s end.
This makes VMW shares appealing right now, for two reasons. First, investors buying today can scoop up the relatively high spread between VMW’s current stock price, and the per-share acquisition price of this transaction.
Second, as VMW shareholders will receive equity in the newly combined company, those buying today will receive exposure to the potential benefits of this mammoth tech merger deal.
VMW Stock: The Broadcom Deal at a Glance
Semiconductor and infrastructure software company Broadcom’s offer for cloud computing and virtualization software provider VMware is worth approximately $77.35 billion, or $179.75 per share.
On paper, shareholders can choose either cash ($142.50) or 0.252 shares of AVGO for each of their shares of VMW stock.
However, given the proration terms of the transaction agreement, in practice (when exchanging their shares), investors will receive 50% of the cash option, and 50% of the share exchange option. Hence, the aforementioned estimated share price.
As you can quickly tell, this represents around a 9.5% premium to VMW’s current stock price ($161.19 per share). Deal spreads are common with merger transactions, given approval uncertainty.
Again though, crossing these regulatory hurdles, the merger now has a very high chance of completion. U.S. regulators have not challenged the deal.
The transaction appears likely to pass the last outstanding regulatory review (from China). There’s upside potential with a VMW position, besides from increasingly-likely merger arbitrage gains.
Yes, you can decide to cash out completely, if/when you exchange VMW stock for a combination of cash and AVGO stock. Still, there is much merit in letting it ride with the share-paid portion of this transaction, because this deal may produce fantastic growth and cost synergies.
In the merger press release, Broadcom stated that acquiring VMware will increase annual EBITDA by around $8.5 billion within three years.
However, this estimate may be conservative, given it was calculated prior to the emergence of the generative artificial intelligence (or generative AI) megatrend.
As I argued earlier this month, both companies have big exposure to this megatrend. Broadcom’s semiconductor business is benefiting from rising demand for AI chips. VMware is benefiting from increased demand for multi-cloud systems from AI-related end-users.
By offering these products/services under one roof, Broadcom has the makings of being an AI powerhouse.
This could mean outsized revenue and earnings growth in the years ahead. By FY2025 (fiscal year ending October 2025), AVGO may be able to not merely meet, but beat, the current top end of analyst earnings forecasts ($49.89 per share).
Bottom Line: ‘Buy and Hold’ Merger Stock
In the event Broadcom’s future is in line/ahead of expectations, AVGO will undoubtedly continue to climb, even after the stock’s more than 55% rise year-to-date.
Assuming AVGO maintains its current forward earnings multiple (20.4), merely meeting FY2025 forecasts would likely propel it to slightly above $1000 per share.
Reaching prices far north of $1000 per share may be attainable as well, if investors decide to re-rate AVGO to a higher forward multiple.
That said, while VMW offers the opportunity to capture a merger arbitrage spread, plus potential post-merger upside, there’s still the risk China doesn’t approve this deal. Shares would plunge if this were to happen.
Still, if you believe that fears of geopolitical tensions preventing this deal are overblown, and are interested in a unique “buy and hold” merger play, feel free to buy VMW stock.
VMW stock earns a B rating in Portfolio Grader.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.