VMware Shares Rise Amidst Delay in Broadcom Merger

VMware (ticker: VMW) saw its shares surge over 3% on Monday, due to what appears to be a short squeeze. This development comes after Broadcom announced that its $70 billion merger with the software company would be delayed.

Currently, VMware shares are valued at $146.62, surpassing the deal's current cash value of $142.50 per share. The limited float of VMware, which accounts for approximately 4% of its total outstanding shares of around 432 million, makes the stock more susceptible to a short squeeze.

In contrast, Broadcom (AVGO) experienced a minimal increase of 0.3% in its stock price on Monday, reaching $841.25.

Around 96% of VMware shareholders have chosen to receive Broadcom stock as part of the merger consideration. However, these shares are currently locked up until the deal is finalized or terminated. Broadcom stated that it expects to close the deal soon, most likely before the termination deadline of November 26.

Investors have expressed concerns that deteriorating relations between the United States and China could jeopardize the completion of the merger. With China being viewed as somewhat of a black box by many investors, it becomes challenging to assess how this situation may unfold.

Broadcom CEO Hock Tan believes that the delay in closing the deal, which was originally slated for Monday, is due to bureaucratic issues rather than political problems. However, there have been reports in The Financial Times suggesting that the delay is politically motivated.

For VMware shareholders who participated in the election period that ended on October 23, they are entitled to receive $142.50 in cash for each share they hold. While some investors had hoped for an extension of the election period, it seems unlikely if the closing takes place soon.

Shareholders who elected to receive Broadcom stock should anticipate receiving a combination of both stock and cash, amounting to approximately $178 per share according to estimates. It's worth noting that there will be a proration in effect as Broadcom has capped the stock election at 50% of the overall merger consideration, with 0.252 shares of Broadcom being allocated for every VMware share.

The current situation surrounding VMware shares is regarded as unusual by arbitrageurs since they are effectively locked up at the moment. They also point out that potential redemption requests from investors may create challenges.