Broadcom plunges on potential VMware deal, BofA says it could cause 'M&A overhang'
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Broadcom (NASDAQ:AVGO) shares dropped sharply on Monday morning after reports indicated over the weekend that the semiconductor company is working on a deal to acquire virtualization software company VMware (NYSE:VMW), which investment firm Bank of America could create "overhang" on its shares.
Analyst Vivek Arya, who has a buy rating and a per-share price target of $780 on Broadcom (AVGO), noted that the deal is in-line with its strategy, but there could be some short-term bumps in the road until more details come to light.
"If true, we believe an acquisition could potentially be in keeping with [Broadcom's] prior stated strategy of: diversifying into mature enterprise software companies (such as prior acquisitions of Brocade, CA and Symantec Security); reinvesting and focusing in core products, adding features and raising prices; and divesting non-strategic/higher-risk growth initiatives," Arya wrote in a note to clients.
Arya added another deal, however, could boost financial, regulatory and operational risks for Broadcom (AVGO).
Broadcom (AVGO) shares dropped more than 5% to $515 in premarket trading on Monday, while VMware (VMW) gained more than 20% to $116.44.
VMware (VMW) is scheduled to report first-quarter results on Thursday.
KeyBanc analyst Thomas Blakey, who has an overweight rating on VMware (VMW) and a per-share price target of $164, noted "VMware would be a strong fit in line" for Broadcom (AVGO), given its shift towards focusing on enterprise infrastructure and not just being a semiconductor provider.
In addition, Arya noted that although VMware (VMW) is thought of as a virtualization software company, the $40 billion company actively promotes its Project Monterey, which aids in improving server CPUs via data processing unit, or DPUs. 
"DPUs can be used to offload rising network, security and storage tasks and improve the [artificial intelligence/machine learning] efficiency of existing servers," Arya added, noting that the industry is still in the "nascent stages."
Last week, Monness, Crespi, Hardt cut its price target on VMware (VMW), noting a "daunting" geopolitical landscape and the potential for a recession.