Wall Street Positive on Broadcom's (AVGO) Potential $60 Billion Deal for VMWare (VMW)

May 24, 2022 5:44 AM EDT
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Broadcom (NASDAQ: AVGO) is negotiating to acquire VMware (NYSE: VMW) for $60 billion, a deal that would mark one of the biggest buyouts of the year, according to Wall Street Journal.

Broadcom and VMware are currently in talks and could soon announce a cash-and-stock deal that values the cloud computing company at around $140 per share on Thursday, the WSJ reports. However, the price could change as the deal is not yet finalized.

Broadcom is looking to take around $40 billion in debt from multiple banks to fund the deal, according to the report.

Broadcom’s negotiations with VMware come just a month after Elon Musk agreed to purchase Twitter for $44 billion, suggesting that there is still space for major deals despite high market volatility.

The recent market drawdowns have significantly slashed company valuations, making the acquisition targets more affordable. Furthermore, companies that are open to selling are also increasingly interested in accepting stock as a currency in a bid to make a profit when the stock prices recover.

On the other hand, the volume of merger and acquisition (M&A) deals remains considerably lower compared to last year. Since the start of 2022, U.S. companies have struck $789.5 billion worth of mergers so far this year, down 31% from the same period last year, due to higher economic uncertainty and market volatility.

The IPO activity has significantly slowed down as well this year as companies that are looking to go public are waiting for a more peaceful market environment.

If the final price of the deal remains at $140 per share, it would mark a premium of almost 50% to where VMware’s stock closed Friday, though still significantly below the $200+ it has hit two in 2019.

3 Wall Street analysts have weighed in to discuss the potential $60 billion deal.

Morgan Stanley’s Keith Weiss: “The company [AVGO] has a history of buying inexpensive and cash flow generative businesses in both semiconductors, and more recently software, to support Broadcom’s overall earnings and cash flow profile. The company has a track record of successful acquisitions in the semiconductor space by reducing costs and extracting additional cash flow from acquired companies. If VMware is acquired, we see cost reduction and improving operating efficiency as a potential outcome.”

New Street Research’s Pierre Ferragu: “As an archetypical maturing software business, VMWare combine strong fundamentals (high user stickiness, crazy-high returns and incremental returns, innovation-driven pricing power) and very attractive fundamental valuation (10% forward FCF yield on Friday’s close, for an 8-12% p.a. FCF growth potential… who would not want that type of return profile, if it were low risk, as we think?)”

Mizuho’s Vijah Rakesh: “AVGO could triple size of Software Revs from ~$7B to $21B, Software could go from 23% of rev to ~45-48%. VMW would add Infrastructure software and a multi-cloud strategy consisting of: 1) a cloud-native application platform (inclusive of Tanzu, Kubernetes services, etc.); 2) cloudbased infrastructure (VMware Cloud, vSphere, and vSAN); and 3) Secure Edge & Anywhere Workspace (consists of WorkspaceONE, Horizon, SASE, Telco Cloud Platform), all bound by a common layer for management, security, and networking capabilities. We believe there is minimal overlap with AVGO's prior security focused Symantec and enterprise software CA acquisitions.”

By Senad Karaahmetovic

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