Broadcom Ltd’s (NASDAQ:AVGO) offer to buy Qualcomm, Inc. (NASDAQ:QCOM) looks like a great deal for shareholders — on the surface. The market’s non-reaction to Broadcom’s $82-per-share offer speaks volumes. Broadcom lowered the offer on to $79-per-share on Feb. 21.
It is time for Broadcom just give up on bidding for Qualcomm. The under-valued smartphone chip supplier has the potential to close at prices above Broadcom’s offer — but not right away.
Broadcom lowered its bid after Qualcomm raised its bid for NXP Semiconductors NV (NASDAQ:NXPI) on Feb. 20 to $44 billion, or $127.50 per share. The higher bid is a poison pill to ward off Broadcom’s advances. Earlier, Broadcom had stated that they would withdraw their bid if Qualcomm raised their offer for NXP.
On Feb. 26, Financial Times reported that Qualcomm lightened up its hard stance against Broadcom ahead of Qualcomm’s upcoming shareholder meeting.
Qualcomm said it would entertain an offer if Broadcom offered a lofty $160 billion price tag that included $25 billion in debt. This price comes to $108 per share (not factoring in debt), about 37% higher than Broadcom’s current offer.
The “change” in tone does actually not change anything. The EU, China and South Korea may still balk over a firm of this size. Qualcomm may also need to negotiate a high break-up fee to offset the risk of the deal falling through due to regulations.
Even Broadcom’s Lowest Offer Isn’t Good For Them
Even if Broadcom’s current offer were accepted, shareholders would get $57 in cash and $22 in Broadcom shares. The problem with this payment method is that AVGO stock is over-valued at the moment. It trades at a PEG of 4 times and at a P/E of 63 times.
At this point, Broadcom should just back down on raiding the Snapdragon supplier and trying to get the firm at a steep discount.
Getting regulatory approval for an AVGO-QCOM-NXPI combined firm is unlikely. It would raise too many antitrust concerns, resulting in a drag on QCOM’s stock price for next several years. And Qualcomm would not trade at anywhere close to Broadcom’s offer price during that period of uncertainty.
Qualcomm Has Low Valuation for Two Reasons
The problem for Qualcomm is that Broadcom’s interest in Qualcomm is likely driven by the latter’s low valuation. QCOM stock is missing out on the sharp rally in semiconductor stocks for two reasons.
First, the NXP Semiconductor buyout still awaits one more approval from regulators. Once approved, it will remove one unknown in Qualcomm’s outlook. The joint firm will have a wider array of products and the company will have more revenue growth than as separate companies. Broadcom seems to know that.
Apple Inc.’s (NASDAQ:AAPL) challenge over the royalty rates and fees owed to Qualcomm is the second big unknown hurting its stock.
In a related note, the European Commission already fined Qualcomm EUR 997 million for abusing its market dominance in LTE baseband chipsets. Courts allowed the FTC U.S. antitrust lawsuit against Qualcomm to proceed. That would suggest Qualcomm has not been assured a legal victory over Apple.
Qualcomm Should Remain a Standalone
Qualcomm’s antitrust lawsuits are unfortunately mistimed against the upcoming shift in technology.
The positive catalysts ahead include 5G, Edge Computing, Autonomous driving and AI — just to name a few. Qualcomm, along with its NXP Semiconductor acquisition, are strategically positioned to grow its business in those new markets. As a standalone, the company has the flexibility to invest in the R&D to lead in the new markets. If Broadcom were to own it, Qualcomm would be less nimble. In short, shareholders would be giving away the company’s plans at a discount.
NVIDIA Corporation (NASDAQ:NVDA), Facebook Inc (NASDAQ:FB) and Intel Corporation (NASDAQ:INTC) are just a few examples of companies that were out of favor at one point. Markets, as usual, bid the stock lower despite the strong, future prospects. Qualcomm is in the same boat. Qualcomm’s core business — technological advancements in smartphone and mobile solutions — will keep moving forward.
Now for the reward, it may just be a matter of investors waiting for Qualcomm’s storm to end.
As of this writing, Chris Lau held no positions in any of the aforementioned securities.
