Why the case for owning Broadcom is compelling with or without its $61 billion takeover of VMWare

Published Mon, Oct 30 20231:55 PM EDT

Kevin Stankiewicz @in/kevin-stankiewicz-b5593466 @kevin_stank

Club holding Broadcom 's (AVGO) investment prospects look bright – with or without cloud software maker VMWare (VMW) under its corporate roof. For now, though, the companies remain apart after Broadcom's planned $61 billion takeover of VMWare did not close Monday, as previously scheduled. The hold-up is Chinese antitrust regulators, who have yet to bless the deal, CNBC's David Faber reported. Nevertheless, Broadcom and VMWare expect the deal to close "soon," or at some point before the Nov. 26 termination deadline , the companies said Monday in a joint statement. "If you had to ask me what I'd be a buyer of here in our portfolio, right now I would go buy 10 shares of Broadcom," Jim Cramer said during Monday's Morning Meeting . Shares of Broadcom were down modestly to start the week to around $835. VMWare's stock traded roughly flat at around $142 per share. AVGO YTD mountain Broadcom YTD With VMWare, Broadcom would be a company with sales split roughly 50-50 between its traditional semiconductor division — an artificial intelligence beneficiary — and software, which typically is higher-margin revenue. VMWare, which generated $13.4 billion in revenue in its most recent fiscal year, sells software that's critical in the cloud-computing industry. Broadcom's total revenue is expected to be nearly $36 billion in its fiscal year ending this month. Adding VMWare to the mix would give Broadcom another growing revenue stream that — when coupled with Broadcom's usual cost-cutting dealmaking playbook — should increase in profitability in the future. Without VMWare, Broadcom would have freed up its capacity to reward shareholders in a different, but still meaningful, way. "If this deal doesn't go through, then Hock Tan will buy a huge amount of his stock," Jim said, referring to Broadcom's venerable CEO and president. Broadcom in early August paused its share repurchase activity, citing regulatory rules associated with the pending VMWare acquisition. As of July 30, the company had $7.3 billion remaining on its existing stock buyback authorization. In either scenario, Broadcom will still maintain an AI business that Jim called the second best among all semiconductor companies, trailing only fellow Club holding Nvidia (NVDA). Broadcom's AI business has two main buckets. The company helps Google parent Alphabet (GOOGL) make custom chips used for AI computing called tensor processing units (TPUs), while also selling products that stitch together multiple servers inside data centers. The latter is known as networking technology, and Broadcom's key products in that area are the Tomahawk 5 switch and Jericho3-AI router . Even with the buyback silver lining, our hope is Broadcom completes the VMWare deal because it should boost Broadcom's earnings over time. Competition regulators in the European Union, United Kingdom and other jurisdictions including Japan and Canada have cleared the transaction, which was first announced in May 2022. In Monday's statement, Broadcom and VMWare said, "There is no legal impediment to closing under U.S. merger regulations." The specifics around China's antitrust review are somewhat opaque. However, Broadcom's Tan believes the hold-up is due to bureaucratic reasons, not political considerations, according to CNBC's Faber. Earlier in October, the Financial Times said regulators in China were considering delaying the approval, particularly after the U.S. government imposed a tougher set of restrictions on AI technology being sold into China. In August, U.S. chipmaker Intel (INTC) abandoned a $5.4 billion deal to buy Tower Semiconductor (TSEM) after Chinese regulators failed to sign off on the transaction before an agreed-upon termination date. Intel had to pay Tower a $353 million fee as a result. For its part, Broadcom would need to pay VMWare a $1.5 billion termination fee if antitrust approvals prevent the acquisition from closing by the November deadline, according to the merger agreement . In 2018, amid U.S.-China trade war tensions, California-based chipmaker Qualcomm (QCOM) scrapped a plan to buy Dutch rival NXP Semiconductors after a regulatory deadline passed without securing approval from Beijing. In response, Qualcomm boosted its existing stock buyback program by 50% to $30 billion . There's been hope among some investors that Broadcom would be able to secure Beijing's approval because VMWare is a software company, not a chip designer or producer. For example, China recently gave the green light to Club holding Microsoft 's (MSFT) blockbuster acquisition of video game maker Activision Blizzard. That tie-up closed earlier this month . (Jim Cramer's Charitable Trust is long AVGO, NVDA, MSFT and GOOGL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Hock Tan, CEO of Broadcom

Lucas Jackson | Reuters

Club holding Broadcom's (AVGO) investment prospects look bright – with or without cloud software maker VMWare (VMW) under its corporate roof.