(Financial Times)
A Broadcom mega-deal blindsides
Wall Street Broadcom chief executive Hock Tan may earn the title as the serial acquirer to have two megadeals get caught up in geopolitical tensions between the United States and China. Tan in 2017 reincorporated Broadcom’s headquarters in the US and was celebrated at the White House as a corporate hero by then president Donald Trump as he sold aggressive corporate tax cuts to the nation.
But Tan’s political dalliance proved to be humiliating. Weeks later, Trump blocked Broadcom’s attempt to buy Qualcomm for $142bn over national security concerns as he pressed a trade war against China. Now Tan may find more disappointment from spiralling tensions between the world’s two largest economies. China’s regulators are threatening his $69bn takeover of cloud software group VMware by not signing off on the blockbuster acquisition, according to the FT’s Qianer Liu, Cheng Leng and Ryan McMorrow.
The news has major implications for Wall Street. It threatens the close of a deal many arbitrage funds had considered all but wrapped up. VMware earlier this month said it expected the deal to close by the end of the month and had just asked shareholders to make elections on the stock portion of the takeover. It could have an even bigger impact on private equity. VMWare’s existing owners Michael Dell and US technology private equity group Silver Lake stand to get billions in cash from its close.
Now the outcome hangs in the balance for a half-cash and half-stock deal that has risen in value since being agreed in May 2022, due to Broadcom’s soaring stock price. Everyone now has to rejigger their expectations. “On Friday last week, this was trading with a greater than 90 per cent probability of success and now it is trading like a coin flip,” said one large hedge fund investor. Beijing is unlikely to block the deal formally, industry insiders told the FT, but it could extend the review process indefinitely until both parties give up the deal. Such a move comes after Washington further tightened strict export controls this week on artificial intelligence chip sales to China, which will severely hamper Chinese tech groups’ AI development.
Shares in VMware fell nearly 10 per cent in trading in New York on Thursday. Deals between large multinationals in which either party generates revenues in China of more than $55mn must be approved by Beijing’s anti-monopoly police. This would be the latest time China has used its anti-monopoly oversight to scupper a large acquisition by a US tech group as relations deteriorate between the two superpowers. Semiconductor giant Intel in August cancelled its $5.4bn acquisition of Israeli chipmaker Tower Semiconductor after failing to get the green light from Beijing. Were the deal to prove undoable, it would be yet another hit in a rough year for merger arbs, whilst cancelling a massive private equity exit at a time when limited partners have grown frustrated with the slow drip of cash being returned to them by buyout firms.
