Evaluating the 4 main possible situations and outcomes that can result from the Broadcom-Qualcomm Bid

November 6, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Broadcom made headlines Friday when the company announced it would bid to buy Qualcomm for $70. If completed, the deal would be the richest in tech history, valued at nearly 100 billion dollars. However, there are many factors that can destroy the bid and potential deal. Here is what I recommend you should do depending on the situation:

 

Situation 1: Broadcom completes the deal and buys out Qualcomm at $70/Share.

This is what is expected to happen, but let me explain what should ensue. Broadcom would expand its chip base, allowing them to have dominance in both WiFi and data (Qualcomm's specialty). Assuming Qualcomm is able to complete their NXP Semiconductors deal (which Broadcom will allow before they complete their deal, theoretically), Broadcom would take over NXP's expanding presence in both the self-driving and IoT industries. To top it off, since Broadcom would inherit Qualcomm's large licensing deal with Apple, Broadcom would take more "iPhone space", meaning that they would control most of the iPhone's technology from a chip perspective. If this is Broadcom's goal (to attain more "iPhone space"), this indicates that the tech industry expects iPhone consumption to only grow. With Apple's recent launch of the iPhone X and all the hype surrounding it, it would make sense for Broadcom to jump the ship and make this rich bid. 

My recommendation for Situation 1: Buy Apple & Broadcom, Sell Taiwan Semiconductors

 

Situation 2: Anti-Trust issues terminate Broadcom's bid.

This is the most likely outcome. Qualcomm and Broadcom are both the fourth and fifth largest semiconductor companies in the world. This type of merger would spark a series of complaints from other Semiconductors (such as Taiwan Semiconductors or Intel) and an inevitable intervention from the Department of Justice. Even though Broadcom's CEO Hock Tan announced the company would be coming back to America (which made Trump very happy), the DOJ and other anti-trust government sectors would be called to action in such an enormous M/A. Such a shutdown can drive Broadcom's value down only by a little, as they have been outperforming Qualcomm by nearly 35% this from the start of 2017. However, since Qualcomm has been struggling as of late (before shares shot up after rumors of the bid were announced), a DOJ shutdown into perhaps the biggest M/A in the past decade will only send shares down further.

My recommendation for Situation 2: If you are not very risk-tolerant, partially sell a preexisting stake in Broadcom or avoid it entirely. As for Qualcomm, fully sell a preexisting stake and reenter at a price of $40-45.

 

Situation 3: Qualcomm turns down Broadcom's offer, Broadcom enters into a bidding war.

Qualcomm and Broadcom have always been bitter competitors for many years, so I would not be surprised if they turn down Broadcom's initial offer. What would intrigue me is if Qualcomm and its shareholders were still interested in being bought out. If this is case, I expect Intel to enter the Qualcomm sweepstakes. Both Broadcom and Intel should drive up Qualcomm's value only till a certain extent as I firmly believe both companies will be subject to DOJ intervention (Intel is the largest semiconductor company in the world, so their bid would inevitably involve the DOJ and other governments in some way).

My recommendation for Situation 3: Buy Qualcomm now and sell on any rumor Intel or anyone else is interested in buying the company.

 

Situation 4: Qualcomm and its shareholders reject Broadcom's offer, decides to stay independent.

This situation is unlikely as Qualcomm's shareholders will now want a buyout after this year's poor performance (relative to its competitors). However, if this does happen, I expect Broadcom to dip by a little in the short run, but Qualcomm to dip in the long run. Qualcomm needs a partner to get over the hump and become a competitor with Intel in the future, and Broadcom fits that criteria. If not, then Qualcomm's struggles should only progress.

My recommendation for Situation 4: Avoid both stocks if you do not already have a preexisting position. If you have a position in QCOM, sell all of it. If you have a position in Broadcom, keep it ( I do not expect said dip to be impactful at all in the long term).

 

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