VMware Should Not Expect a White Knight; Wish Sidelined as Dollar Stores Rally
Broadcom made official its plan to acquire VMware in a cash-and-stock deal worth around $61 billion. The deal underscores the degree to which CEO Hock Tan has transformed Broadcom from a maker of networking chips into a formidable player in enterprise software.
The agreement includes a “go-shop” provision allowing VMware to solicit bids from other companies until July 5. But Broadcom is paying a rich premium, which may dissuade other bidders. The deal works out to about $138 per VMware share, about 44% above where VMware was trading before word of the deal leaked last weekend. And VMware was starting from a relatively higher base: Its shares were down 18% this year through last Friday, compared with a 28% decline for the Nasdaq.
Broadcom is likely expecting to make the deal pay off in part by cutting costs at VMware, as it has done with past acquisitions. David Bicknell, principal analyst at GlobalData, said head count at CA Technologies fell 40% after Broadcom bought the software company in 2018, “and employee termination costs were also high at Symantec,” a maker of security software that Broadcom bought the following year.
But don’t cash those checks just yet. As we reported earlier this week, the deal could face an antitrust challenge from U.S. regulators. The Federal Trade Commission is already investigating Broadcom for allegedly forcing customers into exclusive agreements, making it difficult for them to shop around, less than a year after the company settled an FTC case involving similar allegations of anticompetitive conduct regarding its customers.
Wish for Something Better
Could Wish parent ContextLogic get a recessionary lift? The operator of the Wish app, which features cheaply made items displayed in an Instagram-like feed, has often been described as the dollar store of the internet. Brick-and-mortar retailers like Dollar Tree and Dollar General have thrived in past downturns, particularly 2007–08, as cost-conscious middle-income consumers have sought out deals. For that reason, their stocks have proved particular favorites for investors when the economic outlook darkens. That seems to be the case again.
Dollar Tree on Thursday reported that its net income increased 43% to $536 million for the quarter ended April 30—even after lifting prices on most items past a dollar (to $1.25!)—and it raised its sales outlook for the year. Dollar General’s performance was weaker: Profit slipped 18% to $553 million. But it also hiked its sales outlook for the year. Stocks for both rallied more than 13% Thursday.
Wish shares, however, caught only a tiny bit of that tailwind, rising 1% to $1.63. (Its market cap of $1 billion is now just a tenth of its highest private-market value.) It’s not hard to see why investors have viewed Wish with more skepticism than they have physical retailers, even though those chains are also struggling with labor shortages and rising wages.
Even before talk of an inflation-driven recession heated up this year, Wish’s revenue had spiraled lower, as the end of pandemic shutdowns and reduced spending on marketing caused some customers to flee. Revenue fell 18% last year and it booked a $361 million loss. Its first-quarter results did not improve the picture much: In early May it announced negative free cash flow of $148 million as revenue sank 76%.
Wish’s CEO, Vijay Talwar, appointed after founder Piotr Szulczewski stepped down as CEO late last year, is now heading up a turnaround that involves paring down to a much smaller workforce and employing new strategies to keep its users from bolting. In theory, a recession should be good for a consumer seller like Wish. In reality, its problems may be recession-proof.—Laura Mandaro
Alibaba’s Feint
Don’t get too excited about a recovery in Chinese tech based on Alibaba’s results. The Chinese e-commerce giant said revenue for the quarter through March rose 9%, helping drive a 13% rally in shares in New York. But the results largely predate China’s severe Covid-19 lockdown in Shanghai starting in late March, which has hit supply chains for manufacturers and retailers. A bad sign: Alibaba didn’t provide an annual revenue forecast for the fiscal year ending in March 2023.—Shai Oster
In Other News…
Instagram plans to slow the pace of hiring in the second half of the year, Bloomberg reported.
The U.K.’s Competition and Markets Authority has opened a new investigation into Google’s ad business.
Dell said its quarterly revenue rose 16% to $26.1 billion, boosted by sales of business PCs.
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