In a pivotal development, Broadcom Inc. (NASDAQ: AVGO) is on the brink of acquiring VMware Inc. (NYSE: VMW), prompting shareholders to make a crucial decision regarding their preferred mode of compensation – either cash or shares in Broadcom. This choice initiates a lock-up period that restricts shareholders from selling their holdings until the acquisition concludes.
On Monday, VMware’s shares closed at $156.22, but they are anticipated to decrease to approximately $142.50 by Tuesday. This indicates that the immediate sale of shares may yield more significant returns than shorting the stock on Tuesday. Broadcom is working diligently to finalize the transaction by October 30, though the approval from Chinese regulators may face potential delays due to United States chip sanctions.
Aaron Glick, an analyst at TD Cowen, speculates that this lock-up period may have contributed to the recent decline in VMware’s share price. Shareholders have two options for compensation: either a cash payment or 0.252 shares of Broadcom common stock for each VMware share they own. The latter option holds a 51% higher value than the cash payout. However, if an excessive number of investors opt for this stock-based compensation, they will receive only half of their payment in Broadcom equity.
According to real-time metrics provided by InvestingPro, VMware currently boasts a market capitalization of $67.31 billion and a price-to-earnings (P/E) ratio of 46.72. The company’s revenue stands at $13.61 billion, with a gross profit of $11.07 billion, underlining its impressive gross profit margins, as noted by InvestingPro Tips. Despite these financial strengths, VMware’s stock has experienced a significant downturn over the past week, with a 1-week price total return of -15.64%.
In stark contrast, Broadcom is a dominant player in the Semiconductors & Semiconductor Equipment industry, with a market capitalization of $355.87 billion and a P/E ratio of 25.91. The company has consistently elevated its earnings per share and has raised dividends for 13 consecutive years. Its current revenue stands at $35.45 billion, with a gross profit of $26.33 billion. Although Broadcom’s stock has seen a 1-week price total return of -5.42%, it has delivered a substantial return over the past year, with a 1-year price total return of 94.85%.
InvestingPro Tips underscore that both companies exhibit robust earnings quality, with free cash flow surpassing net income. VMware, despite its recent earnings per share decline, maintains a prominent position in the Software industry and continues to generate a high return on invested capital. Conversely, Broadcom demonstrates a consistent upswing in its earnings per share and operates with a moderate level of debt.
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