How many battles can a single company fight at once? Qualcomm, Inc. (NASDAQ:QCOM) shareholders are about to find out. QCOM stock has stayed in a holding pattern since early November, but that will change shortly.
After all, the company has its hands full. It’s still in a fight with Apple Inc. (NASDAQ:AAPL) over royalty payments, with reports that Qualcomm chips may be removed from both the iPhone and iPad.
Its planned acquisition of NXP Semiconductors NV (NASDAQ:NXPI) has stalled out. Activist firm Elliot Advisors is arguing that NXPI is worth at least $135 per share, not the $110 Qualcomm offered.
Qualcomm has to choose whether to raise that bid or walk away from a deal most observers saw as logical and attractive and a way to compete within the automotive space with rivals like Nvidia Corporation (NASDAQ:NVDA) and Intel Corporation (NASDAQ:INTC).
Regulators continue to target Qualcomm’s operating model. The EU fined the company $1.2 billion this week. And, of course, Broadcom Ltd (NASDAQ:AVGO) has launched a hostile takeover, offering $70 per share for Qualcomm stock.
It’s a dizzying amount of news, and it’s no wonder QCOM has stayed range bound since the Broadcom offer was unveiled. For now, the current $68 price for QCOM stock seems about right given the crosswinds facing the company. But the stock will move off that level relatively soon. The question is in which direction?
A Raised Bid for Qualcomm Stock
On Thursday morning, CNBC’s David Faber reported on the Broadcom-Qualcomm talks. Faber has a long track record of getting good scoops on major deals, and his reporting suggests there should be news on the merger relatively soon.
Broadcom has nominated a slate of directors for Qualcomm’s annual meeting on Mar. 6. To get those votes, Broadcom has to raise its bid, as I detailed last month. No QCOM shareholder is going to accept the current offer of $70. Such a deal would lead Qualcomm stock to decline, given the time needed to close the deal and the regulatory uncertainties surrounding the merger.
On Thursday, however, Faber reported that we are “probably days away” from a higher bid. What that bid will be is the question. Referring to Broadcom’s CEO, Faber told listeners that “Hock Tan, the man behind all of this, is going to have to make a big decision as to how high he wants to go — whether [the bid] is going to have an ‘8’ in front of it.”
From here, it does look like Broadcom has to bid more than $80. Broadcom has said it could close a deal within 12 months, and it has disputed Qualcomm’s assertions that there’s no guarantee antitrust regulators would approve the deal.
But assuming a $75 bid price, arbitrageurs would likely want in the range of 10% returns — at least. They will need to account for the time to close — which will be close to a year, if not over, no matter Broadcom’s protestations — and the risk of the deal being outright rejected.
At $75, a 10% cushion implies basically zero gains for QCOM stock. Broadcom’s offer needs to be $80 — and probably closer to $85 — to win the board seats it seeks.
The Problem for QCOM Stock
The problem for investors, however, is that it’s not that simple. Assume Broadcom bids, say, $83. That in turn likely implies that QCOM should move up to $75, if the bid were the only consideration. But it’s not.
Qualcomm shareholders still have to vote in the board. And with many of those shareholders having bought, or owned, QCOM near $80 back in 2014, $80-$85 may not be attractive enough. Others may believe the bid still undervalues Qualcomm stock.
Whatever Broadcom’s bid, it’s far from guaranteed it will be accepted, even if that bid is raised to $85. For now, Qualcomm simply stays in limbo, and there’s still much left to be resolved.
What Happens Next?
If a bid is rejected, QCOM becomes a risky play. Qualcomm has to deal with NXPI and a potential need to raise that bid by as much as $10 billion (assuming a move to $130-$135 from the current $110 offer).
It has to settle the Apple dispute. And it has the ongoing risk that its model — the same model being criticized by Apple — is going to face increasing regulatory pressure, given it’s already paid over $3 billion in fines in Europe, South Korea and China.
And, really, what’s the upside here? An accepted $85 bid maybe moves QCOM stock to $78 or so — about 15% upside. The downside scenario — no Broadcom buyout, no NXPI deal, and increased regulatory scrutiny — likely sends QCOM down as much as 25%, back toward its recent levels in the low $50s.
Will Healy argued on this site earlier this month that Qualcomm was headed for a lose-lose situation. I don’t see it as quite that desperate, but I still see far too much uncertainty to take a hard stance on Qualcomm.
This is going to be a fascinating story, however it plays out. But it’s a story that can go in multiple directions at the moment, and not all of them will turn out well for Qualcomm shareholders.
As of this writing, Vince Martin has no positions in any securities mentioned.
