Will the back-and-forth drama between Qualcomm, Inc. (NASDAQ:QCOM) and Broadcom Ltd (NASDAQ:AVGO) ever come to an end? At the moment, it doesn’t feel like it. But that hasn’t stopped investors from gobbling up Qualcomm stock.
The unfolding of a potential deal has been strange to say the least. In November, Broadcom offered to buy Qualcomm for $70 per share, but QCOM objected. Broadcom upped its price, and Qualcomm — you guessed it — still said no.
Then Qualcomm upped its bid for NXP Semiconductors NV (NASDAQ:NXPI) — which it’s in the middle of acquiring — because NXPI has become undervalued vs. its peers.
After QCOM upped its bid for NXPI, though, AVGO lowered its just-raised bid of $82 per share for QCOM to $79 per share.
The most recent development leaves both QCOM and AVGO management teams working toward a deal. As a result, Qualcomm stock has been on the rise and nearing its 52-week highs. Qualcomm has apparently “dropped its objections” to being acquired but is seeking a price above $90 per share. That would put the deal closer to $160 billion when accounting for debt.
Aside from the price, there are other terms the companies still need to agree on before a deal can happen. Finally, adding a bit more drama to the event is Broadcom’s push to take control of Qualcomm’s board. Broadcom has an investor meeting on Mar. 6, and if it can leverage control of Qualcomm’s board, it can make an acquisition that much easier.
Should Investors Buy Qualcomm Stock?
It’s worth pointing out that QCOM stock was trading for less than $54 when this deal was announced. It’s now at around $65. Assuming Qualcomm acquires NXPI, how much is it worth?
You could argue that Qualcomm is worth more than it was before the buyout offer from Broadcom. Still though, if Broadcom were to walk away from the deal, Qualcomm stock could easily fall to $60 or perhaps even lower.
Let’s work with the idea that Qualcomm wants to get a deal done. Broadcom’s latest offer for $79 per share is roughly 20% higher than current levels. The offer includes $57 per share in cash and $22 per share in stock. Additionally, Broadcom has an impressive history in integrating its acquisitions, cutting costs and boosting performance.
In a nutshell, Qualcomm investors can see a 20% gain to their current holdings and receive roughly one-quarter of the deal in Broadcom stock. Meaning that, if they want to stay long Qualcomm due to its future potential, they have a way of doing so by staying long the shares they receive from Broadcom in exchange for their holdings in Qualcomm (along with cash).
On top of the 20% overnight gain investors would realize, also consider Broadcom’s $79 offer is almost 50% above where Qualcomm stock was trading before the original offer.
I am not sold on Broadcom offering more than $90 per share for QCOM. However, could it return to its recent $82-per-share offer? How about somewhere in the middle at $85? Qualcomm management might not want it, but it’s hard to see shareholders not wanting a deal, especially given how much QCOM stock could fall if a deal doesn’t materialize.
Trading QCOM Stock
There’s key short-term support between $60 and $61. Resistance is sitting heavily at $68. Can Qualcomm stock push through? Unfortunately, both of these levels will only hold up for so long. The stock will likely burst through one or the other depending on the outcome of this deal.
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I don’t think $50 is on the table, but a drop to the $57-to-$60 area is possible if no deal is made. That said, upside to the upper $70s or possibly higher exists if a deal gets done. Investors proficient in options could speculate with a few calls or call spreads above $68. Keep in mind though, if there’s no deal, then these plays will likely expire worthless.
While it appears to me that Qualcomm management does want a deal, we must live with the risk that one may not materialize. For that reason, know that near-instant losses of 10% or more could exist.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
