Cash, stock elections often provide a little extra return
In the Broadcom-Avago merger, Broadcom (BRCM) shareholders will have the right to choose from the following four options for their stock:
- elect to receive $54.50 in cash (the cash election) or
- elect to receive .4378 shares of Avago (AVGO) stock or
- no election, which means 50% cash and 50% stock (in other words, $27.25 + .2189 AVGO) or
- elect to receive .4378 shares of restricted AVGO stock
Take a look at above chart. If Avago falls below roughly $124.50 per share, then the cash consideration of $54.50 will be worth more than .4378 shares of Avago. Conversely, if Avago is trading well above $124.50 per share, the stock election will be worth more. Your broker will begin sending out election notifications from the corporate action desk well in advance of the election deadline.
These elections are limited by caps of no more than 50% of the ultimate consideration consisting of either stock or cash. Then elections are subject to proration. This means that if the stock election is superior and you elect 100% stock for your Broadcom stock, you won’t actually get all stock. This is because the stock election will probably be oversubscribed, which means more people have asked for stock than Avago has available to distribute. That said, sometimes people make the wrong election or forget to make an election, which means a shareholder who isn’t napping can take advantage of that.
Some option scenarios
Let’s say Avago stock goes out at 140 and .4378 shares of Avago are worth more than $54.50. Most shareholders will elect stock, so it will be oversubscribed. However, some will make no election, and others may choose cash. There’s a chance you might get a little more stock.
However, consider what happens if Avago trades down to $100 per share. The cash consideration is worth more, and you would expect to see most shareholders elect cash. However, remember that there’s a restricted stock election, which is illiquid but tax-advantaged. It may make sense for some shareholders who have a low cost basis to elect to defer the taxes and elect stock. In that case, you might end up with more cash than you would expect, which would boost your return.
As a general rule, elections where non-electors get the undersubscribed consideration have more upside than ones where non-electors get the mixed consideration. But the tax implications of this transaction might provide a little upside.