Merger Monday's Latest Target Hints at Value in Tech – The Motley Fool

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The stock market has been in a consistent downturn for months now, with little relief for investors along the way. However, Wall Street got a little bit of a reprieve late Friday, when markets rebounded from deep losses to finish roughly unchanged on the day. The positive momentum from that bounce seemed ready to continue on Monday morning, and gains were fairly widespread. As of 7:30 a.m. ET, futures on the Dow Jones Industrial Average (^DJI 0.15%) were up 319 points to 31,532. S&P 500 (^GSPC -0.81%) futures had gained 43 points to 3,943, while Nasdaq Composite (^IXIC 0.00%) futures were higher by 113 points to 11,953.
Most investors see technology stocks and value investing as mutually exclusive. However, with the bear market in the Nasdaq focusing largely on technology stocks, share prices have fallen low enough in some cases to warrant a new look at companies as potential value candidates. That appeared to be the motivation behind speculation about a major acquisition Monday morning, and it could drive investors to look at other companies as possible takeover targets at their much lower prices.
Image source: Getty Images.
Shares of VMware (VMW -2.92%) were up 21% in premarket trading on Monday morning. News reports over the weekend indicated that the cloud software provider was in discussions with chip giant Broadcom (AVGO -0.41%) toward a prospective deal.
The companies haven’t reached any firm agreement as of yet, and it’s unclear even what an eventual purchase might look like. Some of those following the deal suggested a $50 billion value for VMware, which would represent a roughly 25% premium from its $40 billion market cap based on the stock’s closing price on Friday.
Broadcom has followed an acquisition-based strategy toward expansion, and buying VMware would potentially become a crowning achievement for the company. Buyouts over the past six years include the $5.9 billion acquisition of network switch specialist Brocade Communications Systems, the $18.9 billion buyout of CA Technologies, and the purchase of Symantec’s enterprise security business for $10.7 billion.
The implications of a VMware purchase could be far greater for Broadcom. By giving it access to VMware’s inroads with the data center space, Broadcom could put itself in a better strategic position to capture a broader swath of the semiconductor chip market.
Where a potential takeover might get hung up is on valuation. Even a hefty premium to Friday’s $96 per share closing price would likely fall short of the $168 per share VMware stock fetched as recently as last October. Indeed, VMware shares briefly topped the $200 level in early 2019.
That might not be such a big obstacle if it weren’t for the fact that Dell Technologies CEO Michael Dell holds a roughly 40% stake in VMware in his personal capacity. With plenty of wealth from other business ventures, Dell can afford to play hardball in order to get Broadcom to pay as much as possible for VMware.
If a deal gets done, the most interesting thing about it might well prove to be the price where the two parties land. If it’s closer to current levels, then it could signal to tech investors that they need to accept a new valuation regime based on the changing macroeconomic factors that have hit the market lately. However, if the final price ends up closer to 2021 peak levels, then it could convince investors that the Nasdaq bear market was only a fleeting phenomenon.
Regardless, investors should prepare for a slew of acquisition proposals in the months to come. Despite challenges to raising capital for buyouts, prices on target companies could eventually get so low that they become irresistible — if they haven’t reached that level already.

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