Arbitrageurs, who buy a stock to profit from a takeover, are big losers today after the U.S. government ended the drama between Broadcom Ltd (NASDAQ:AVGO) and Qualcomm, Inc. (NASDAQ:QCOM) by giving their deal a firm “no.”
A presidential order issued after trading closed Monday now forbids the deal on grounds of national security.
The order comes a little over four months after Broadcom first announced its intention to pay $70 per share for Qualcomm, with CEO Hock Tan celebrating next to Trump in the Oval Office, promising to move Broadcom’s offices to San Jose. The Broadcom offer was raised to $82 per share in February.
Qualcomm stock is trading at $60.71 as of this writing.
NXPI a No Go?
The cancellation has deep ramifications for the entire tech sector, especially since the Administration’s reason for it was fear of China taking vital U.S. technology from a Singapore company. Tan, now 65, is a Malaysian national who first came to the U.S. at age 18 to attend MIT.
Broadcom moved to buy Qualcomm in November 2017, roughly a year after Qualcomm announced a deal to buy NXP Semiconductors NV (NASDAQ:NXPI), a Dutch company working on chips for self-driving cars. The original price on that deal was $110 per share, but Qualcomm raised its bid to $127.50 per share recently in order to fend off Broadcom, which lacked the resources to buy both Qualcomm and NXPI.
Arbitrageurs seemed confident the Qualcomm-NXPI deal would close today, with NXPI prepared to open at over $123.50, but China has not yet approved the transaction, and now has no reason to do so.
The scuttling of the Qualcomm deal also represents a victory for two “cloud czars,” Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) and Microsoft Corporation (NASDAQ:MSFT), which said in December it opposed the deal because it would favor Apple Inc. (NASDAQ:AAPL).
Their reasoning was that Tan has a reputation for running his companies as a “roll-up,” buying a monopoly position in key technologies, cutting research and raising prices. If Broadcom cut Qualcomm’s research spending it would favor Huawei Technologies Co. Ltd., angling to dominate the market for 5G networking. Broadcom’s ticker symbol, AVGO, is the result of Tan’s own purchase of Broadcom, through a company then called Avago Technologies, announced in 2015 for $54.50 per share.
Broadcom has doubled in value since the Avago deal closed in 2016 and is currently trading today at $268 per share.
Will There Be (Trade) War?
The sudden end of the drama should raise fears of a trade war between the U.S. and China, but investors so far are ignoring the possibility.
Apple traded March 12 as high as $181.72 per share, a record, which put its market cap at $922 billion, despite being unable to make its iPhones without Chinese help. Intel could also be hurt in a trade war, as I wrote March 8, because it has major operations in China. Intel stock is currently trading at $53.42, up 3.65% as of this writing.
An early signal on China’s views will come as its regulators continue to consider the Qualcomm-NXPI deal. Approval would be positive for the tech market, but a rejection would be very negative.
The U.S. and China are locked in a tight embrace in technology, with China dominating production due to its low costs and the U.S. dominating in software and capitalizing the space. But the trade isn’t even. China doesn’t allow U.S. companies into key markets, citing its own national security.
Untangling the China-U.S. embrace of technology could cost investors trillions of dollars.
[Editor’s note: This article was edited to correct a statement that inaccurately cited the date of Broadcom’s offer for Qualcomm.]
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in MSFT.