To The Moon

The Biden administration unilaterally upgraded chip-related sanctions against China, affecting not only the 8% intraday drop in $NVIDIA Corp(NVDA)$ (though it closed at -4%), but also the acquisition of $VMware(VMW)$ . $Broadcom(AVGO)$ was planning to acquire VMware for over $60 billion, making it a crucial deal hinging on antitrust regulations in various countries. While countries like the UK, South Korea, and Japan had previously given their consent for this union, China's stance on "chip sanctions" became the most significant variable in this merger. Last Friday (October 12th), there were reports in the media that Chinese regulators had intentions to "greenlight" the deal. However, with the sudden "chip sanctions" escalation by the Biden administration, more uncertainties arose because whether the Chinese antitrust authority would approve it may "depend on the macro environment." VMware witnessed a 7.7% drop in response, and Broadcom fell by 2%. Reviewing this acquisition, AVGO's purchase of VMW was proposed in May 2022, making it one of the most definitive and influential deals in the U.S. stock market, second only to $Microsoft(MSFT)$ acquisition of $Activision Blizzard(ATVI)$ . This week, Microsoft will officially complete its acquisition of ATVI, and the State Administration for Market Regulation (SAMR) had previously estimated that VMW's approval would also come before the end of October. The terms of this acquisition VMW shareholders can choose to receive either $142.50 in cash per share or 0.2520 shares of AVGO common stock (cash + stock). Shareholders' choices will be subject to allocation restrictions, with 50% of VMware shares exchanged for cash and the remaining 50% exchanged for Broadcom common stock. Arbitrage Opportunity As of the closing price on October 17th, the spread has widened from $6.09 on Monday to $17.24, meaning the arbitrage opportunity has increased from 3.4% to 10.5%. When annualized, if it can be determined by the end of the year (within a month and a half), the annualized return could be as high as 85%. Since this is a "cash + stock" acquisition, if you want to pursue a pure "cash arbitrage" approach, you can buy 100 shares of VMW while selling 12.6 shares of AVGO, keeping only the cash part. Of course, if you don't expect AVGO to drop significantly or if you want to hold some AVGO, you can just hold onto your AVGO shares. In addition, the Sell PUT arbitrage on VMW is also a good option. Choose PUT options that expire in about 30-40 days, and the strike price depends on your risk preference! Happy Trading!