Qualcomm, Inc. (NASDAQ:QCOM) and its shareholders have some tough decisions to make. On Monday morning, Broadcom Ltd (NASDAQ:AVGO) raised its offer for the company to $82. And while this would seem like good news for Qualcomm stock, QCOM actually is falling, dropping 4.5% in midday trading.
There are likely two drivers of the pressure. The first is that it remains unclear whether even the raised bid from Broadcom will be accepted.
The second is an analyst prediction that Apple Inc. (NASDAQ:AAPL) will remove Qualcomm from future iPhone releases, replacing its cellular modems with products from Intel Corporation (NASDAQ:INTC).
Combined with a rather tepid fiscal Q1 report last week, Qualcomm looks boxed in. It’s exactly the scenario I worried about just last month in cautioning against owning QCOM stock. I still think that caution is warranted. Because even though the Broadcom offer is the best outcome, it’s far from guaranteed.
Broadcom’s Offer for Qualcomm Stock
It’s no surprise that Broadcom raised its offer. The previous offer of $70 simply wasn’t going to get accepted, given QCOM stock already had moved toward the high $60s.
Broadcom has raised its offer to $82 per QCOM share. $60 of the compensation comes in cash, and the remainder in Broadcom stock. According to a presentation on the offer, Broadcom will offer a “ticking fee”, which raises the cash compensation should the approval process drag on for more than a year.
There will also be a “significant” reverse termination fee, payable to Qualcomm if regulators quash the deal. Broadcom hasn’t detailed the exact amount of either fee.
On its face, it seems like a good deal. $82 represents a 50% premium relative to where QCOM stock traded before rumors of the deal. As Broadcom itself pointed out, Qualcomm stock in its entire history only has traded above $82 for three sessions at the peak of the dot-com bubble.
Does a Deal Get Done?
With QCOM stock dipping from ~$66 to ~$64 on Monday, clearly the market isn’t convinced the deal will go through. And there is a potential monkey wrench here. Broadcom’s offer is contingent on Qualcomm completing its planned acquisition of NXP Semiconductors NV (NASDAQ:NXPI) at $110 per share or not at all.
But NXPI trades near $120, with activist Elliott Advisors (UK) (a unit of Elliott Management, led by well-known investor Paul Singer) arguing the stock actually is worth $135 per share. As such, Qualcomm’s tender offer for NXP has stalled out, with shareholders simply keeping their shares.
It looks as if $110 almost certainly doesn’t get that deal done, and it’s on the back of that $47 billion offer that Qualcomm’s current management has staked its hopes.
So there are roadblocks here. Qualcomm shareholders as a whole have to vote in the Broadcom-nominated board at the annual meeting next month. Management will have to back away from NXP, most likely. It’s far from guaranteed that even $82 will be enough.
Broadcom remains confident in its ability to get the deal through regulatory approval but that’s not guaranteed, either.
From here, $82 looks like a fine offer for Qualcomm stock. I wrote back in November that Qualcomm shareholders should take such a bid, given the company’s continuing regulatory problems and its battle with Apple.
But, again, a deal isn’t guaranteed, and given the moving parts I’m skeptical even $64 makes QCOM stock all that attractive at the moment.
What Is QCOM Stock Worth?
In the months before news of the Broadcom bid leaked, Qualcomm stock traded mostly between $50 and $54. Should Qualcomm accept the $82 offer, it’s likely the stock would move to $75 or so. (The latter figure assumes a ~10% premium for time and risk to closing.)
$64 is right in the middle of that range between ~$52 and ~$75. That implies that as of this moment, the market is pricing in roughly a 50/50 chance of Broadcom’s board being voted in, and the offer being accepted.
Those odds are in the right ballpark. At the least, there seems little edge in betting either way. But it also undercuts the long-term case for QCOM stock. In a buyout, there’s likely ~20% near-term upside, including a dividend payment, and another 10-12% over the next 8-12 months should the deal close.
If the deal breaks, given bad Apple news and disappointing Q2 guidance, QCOM likely drops 20% or so, back toward the low 50s.
Qualcomm’s wisest move is to take the offer. As Broadcom itself pointed out in its presentation, Qualcomm has underperformed badly for several years now. Growth has stalled out. And Broadcom listed slide after slide of broken promises from Qualcomm management on growth, cost savings, and profitability.
Broadcom’s bid is a lifeline for shareholders to finally gain some value in Qualcomm stock (which remains negative on a three-year basis) and have some ownership of upside in the company through Broadcom stock. The problem after the raised bid, however, is the same as it was before.
There are a number of obstacles in the way of that bid. That’s why the market is selling off QCOM stock today, and it’s why investors should do the same.
As of this writing, Vince Martin has no positions in any securities mentioned.
