Qualcomm, Inc. (NASDAQ:QCOM) made a big move on Tuesday. While Broadcom Ltd (NASDAQ:AVGO) watched, Qualcomm raised its bid for NXP Semiconductors NV (NASDAQ:NXPI) to $127.50 per share, from a previous $110. It was an interesting gambit for Qualcomm — and it’s moved all three stocks.
NXPI stock has gained 6%, as the market already had moved shares above the original offer price, thanks to involvement by activist Elliott Advisors (who has agreed to the revised bid). AVGO shares have risen 1.4% — and Qualcomm stock is down 1.6%.
The message from the market is clear: the odds of Broadcom actually buying Qualcomm have come down. Whether that’s a good thing for the QCOM stock price long-term remains unclear.
Qualcomm Makes Its Move
As I wrote last month, Qualcomm has been fighting a number of battles at once.
It’s dealing with what is now a hostile offer from Broadcom, who has raised its bid to $82 per share.
Qualcomm’s $110 per share tender offer for NXP was launched all the way back in October 2016. And only now — after being raised to $127.50 per share — does it look like Qualcomm’s offer will meet the required 70% acceptance from NXP stockholders.
The raised bid for NXP should bring that company into the fold, ending one area of uncertainty.
And it’s a clear shot at Broadcom as well.
In the letter earlier this month announcing its “best and final offer” of $82 for Qualcomm stock, Broadcom made clear that a Qualcomm takeover was “premised on either Qualcomm acquiring NXP Semiconductors…[at] $110 per NXP share or the transaction being terminated”.
And so Broadcom isn’t happy with Qualcomm’s latest move.
In another letter released Tuesday, the company said the bid transferred $4.10 per QCOM share from Qualcomm shareholders to NXPI shareholders. Broadcom said it was “evaluating its options”, and argued that the higher bid “demonstrates the Qualcomm board’s disregard for its fiduciary duty.”
What Happens Now?
There is the possibility now that Broadcom calls off its proxy fight, and simply walks away. But truthfully, that seems unlikely. As Broadcom itself pointed out, the raised bid adds about $6.2 billion to the price paid for NXP. That’s only about 5% of the total value of the bid for Qualcomm.
It’s tough to see Broadcom CEO Hock Tan walking away from a crown jewel like Qualcomm over a 5% difference. Nor should NXP necessarily complicate what will be a difficult regulatory process. The fact that NXPI has moved to near $126 suggests the market sees a very high likelihood of Qualcomm’s acquisition passing regulatory muster.
Broadcom in theory could lower its bid by the $6.2 billion amount. But with the Qualcomm annual meeting just two weeks away, and likely to be closely contested, dropping the bid to $78 could swing the election away from Broadcom. Qualcomm put a thumb in Broadcom’s eye — but there likely is little Broadcom can do in response.
Is Qualcomm Stock A Buy?
Overall, the market’s reaction to the deal seems about right. For NXPI shareholders, it seems wisest to take the money and run, given the small spread left to the offer price. For Qualcomm, the acceptance of the NXP deal does appear to minimize the chances of a sale, even if only modestly. Given that I’ve argued that Qualcomm’s only path to upside is through a buyout, that’s bearish for Qualcomm stock.
Admittedly, other investors might see it differently. Qualcomm director Tom Horton told CNBC that $82 a share was “not even close” to where the QCOM stock price should be.
Many shareholders agree. They see a big opportunity in 5G, and an opportunity to compete with Nvidia Corporation (NASDAQ:NVDA) and Intel Corporation (NASDAQ:INTC) in automotive through the NXPI deal. For those shareholders, Tuesday’s events are a double dose of good news. Qualcomm is less likely to be bought out — and it’s even cheaper.
Overall, I still think there’s too much uncertainty to get too excited about QCOM stock. An accepted bid, given the time to close and regulatory risk, probably gets Qualcomm stock to $75-$78, about 20% upside from current levels. But at this point, a deal looks increasingly unlikely. Should the deal break, I’d expect the QCOM stock price to head back toward the $50s, where it traded before the first Broadcom offer of $70 per share.
From there, it’s all about Apple, and regulatory risk. And those aren’t risks I’m willing to take, as I’ve written before.
But, again, QCOM stock bulls might see it differently — and they’re probably quite happy with Qualcomm’s move.
As of this writing, Vince Martin has no positions in any securities mentioned.