Shares of cloud-computing infrastructure company VMWare (VMW -1.63%) are up 30% in the last week as of Thursday afternoon, according to data from S&P Global Market Intelligence. That's because rumors of semiconductor giant Broadcom (AVGO -2.67%) negotiating a deal proved true. If Broadcom has its way, VMWare will have a new home some 15 years after getting partially spun off from EMC in 2007. EMC is now part of Dell Technologies (DELL -0.72%), which finished divesting its stake in VMWare in 2021.
Broadcom is offering VMWare shareholders an option to take either $142.50 in cash for each share they own or 0.252 shares of Broadcom stock. As of market close Thursday evening, the stock is worth nearly $139 ($550.60 per share for Broadcom multiplied by 0.252).
The total price tag to Broadcom would come to $61 billion. VMWare's board of directors has a "go-shop" period lasting until July 5 in which they can solicit and evaluate competing offers. Given this is poised to be one of the largest-ever acquisitions in the technology industry, there are probably only so many suitors out there that could (or would want to) match or beat Broadcom's offer.
Broadcom has been a serial acquirer of infrastructure software businesses in recent years to complement its chip design empire. Adding VMWare's cloud infrastructure and application platform would add further vertical integration for Broadcom. It would also add a bunch of fresh cash flow to what is already a cash generating machine. Broadcom has produced over $14.4 billion in free cash flow over the last trailing-12-month period. It expects the addition of VMWare would add another $8.5 billion in earnings before interest, taxes, depreciation, and amortization (EBITDA) within three years of a deal being finalized.
This acquisition isn't without its risks. Broadcom is already heavily indebted with $39.2 billion in long-term debt from its previous takeovers. If successful, Broadcom would also assume another $8 billion in VMWare's debt (net of cash and equivalents). To pay for the cash component of the offer, Broadcom has obtained $32 billion in financing, so there's another huge chunk of debt that would be added to the balance sheet.
And of course, there's antitrust regulatory scrutiny that could also put the kibosh on this merger. Broadcom has extensive reach with its semiconductor portfolio, and VMWare has historically been more of a tech agnostic player. I would expect there will be some high hurdles for Broadcom to get a purchase approved, especially in the U.S., Europe, and China. Stay tuned for more details.