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VMware was acquired by Broadcom. In this deal, a typical VMware shareholder:

  1. Had 47.9% of their shares converted to cash at $142.50 per share.
  2. Had 52.1% of their shares converted into 0.252 Broadcom shares.

After normalizing this, each VMware share yielded:

  1. a cash consideration of $68.25 (i.e., 47.9% * $142.50).
  2. a stock consideration of $128.60, representing 0.131292 Broadcom (AVGO) shares (52.1% * 0.252 shares). Based on Broadcom’s stock price of $979.50 on November 24, 2023, these 0.131292 AVGO shares would be worth $128.60.

In total, this amounts to $196.85 per VMware share, broken down as:

  1. 34.6% in cash consideration ($68.25),
  2. 65.4% in stock consideration ($128.60).

Now, for someone holding 100 VMware shares purchased at $150 per share (or $15,000 total cost basis), the question arises: How should the cost basis be allocated between the cash (realized in 2023) and stock considerations (possibly realized after 2023)?

Here are two potential approaches:

  • Proportional Allocation: Should the $15,000 original cost basis be allocated proportionally—34.6% to the cash received and 65.4% to the stock received? This would allocate $5,190 (34.6%) to the cash consideration and $9,810 (65.4%) to the stock consideration.

  • Stock-First Allocation: Alternatively, should the $15,000 cost basis first be applied to the stock consideration (i.e., 100 * $128.60 = $12,860), with the remaining $2,140 allocated to the cash consideration?

Which method of cost basis allocation is most appropriate in this case?

user4910112
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1 Answers1

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Neither.

47.9% of the cost basis should be allocated to cash, 52.1%. of the cost basis should be allocated to the replacement Broadcom shares. The value of the replacement shares is irrelevant, what's relevant is the proportion of the relinquished property. You're selling 47.9% of your VMware shares for cash, and 52.1% for Broadcom shares.

littleadv
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