Tuesday Nov 28 2023 10:45
4 min
Wall Street analysts anticipate that Broadcom (AVGO) stock is positioned to rise following the completion of its acquisition of cloud computing firm VMware.
Broadcom, a diversified technology company specializing in semiconductors and infrastructure software solutions, finalized the acquisition of VMware on Wednesday after receiving conditional approval from China's State Administration for Market Regulation (SAMR). Although the deal was initially announced by Broadcom in May 2022, it faced delays due to an extended review by Chinese regulators.
The cash-and-stock deal for Broadcom's acquisition of VMware, initially valued at $61 billion plus the assumption of VMware's debt of approximately $8 billion when announced 18 months ago, had a closing value of about $83 billion due to the appreciation of Broadcom stock, as reported by Barron's.
In a press release, Broadcom CEO Hock Tan called the acquisition of VMware "another important step forward in building the world's leading infrastructure technology company."
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There were initial concerns that the Broadcom-VMware deal might face a fate similar to California-based tech giant Intel’s attempt to acquire Tower Semiconductor, which was abandoned during the summer due to a lack of Chinese antitrust approval.
In cases where China disapproves of a merger, it typically refuses to approve a deal instead of rejecting it outright, but the absence of approval is effectively a rejection.
The Broadcom-VMware scenario highlights the increasing China risk in the business landscape. Investors are now urged to weigh the U.S.-China relationship alongside the conventional regulatory considerations. One potential upside is the wider spreads — the difference between a stock's trading price and the deal price — creating more profit opportunities.
A visible example of this is the recent drop in Nvidia stock due to the cancellation of artificial intelligence (AI) chip orders intended for Chinese firms. The orders, intended for delivery to major Chinese tech firms like Alibaba Group, TikTok owner ByteDance, and Baidu in the coming year, were called off as they will be subject to the latest U.S. Commerce Department's export controls.
Antitrust considerations didn't pose major issues for the Broadcom-VMware deal since there was minimal overlap between Broadcom and VMware. Chinese regulators approved the deal with certain conditions, including prohibiting the tying of Broadcom and VMware product sales without justification. Broadcom seemed aware of these conditions in advance, promptly announcing the deal's closure on Wednesday following SAMR approval.
Analyst John Vinh from KeyBanc Capital Markets reiterated his Overweight rating on AVGO stock and raised his price target from $1,000 to $1,200 following the completion of the deal. On the stock market on Friday, AVGO stock rallied by 0.7%, closing at $978.87.
Vinh saw the acquisition immediately contributing to Broadcom's gross profit margin and earnings per share. He stressed that the VMware acquisition will enhance Broadcom's software sales and reduce its exposure to the cyclical semiconductor market.
Evercore ISI analyst Matthew Prisco noted that Broadcom's software sales are expected to represent about 40% of its total revenue in the first year post-close, up from 20% before the acquisition. Prisco rated AVGO stock as Outperform with a price target of $1,050.
The next potential catalyst for AVGO stock could be Broadcom's fiscal fourth-quarter earnings report on December 7.
At the time of writing on Monday, Broadcom stock hovered around the $959 mark, having shed close to 2% of its value. The dynamics marked a reversal for the stock, which was up over 5% over as of the Friday close.
Despite the slide on Monday, AVGO stock remains close to 71.5% up year-to-date, as per MarketWatch data.
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Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.
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