Buying Qualcomm: Good, Bad or Ugly for Broadcom?

Buying Qualcomm: Good, Bad or Ugly for Broadcom?

Shares of Broadcom (AVGO) ate falling today after it announced yesterday a $130 billion offer to buy rival computer chip maker Qulacomm (QCOM).

Despite today’s downward move, and speculation yesterday that Qualcomm is not pleased with Broadcom’s unsolicited bid, some analysts see value in the deal…for Broadcom.

MKM’s Ruben Roy calls the deal “strategically and financially compelling,” especially given the potential synergies within the cellular handset and communications infrastructure end markets.

…While there are some areas of product overlap, we believe that the majority of key products from AVGO and QCOM are complementary. AVGO believes that the combined company’s common global customer base would view the proposed combination favorably. Given the increasing complexity and cost in new generation semiconductor design and manufacturing, we believe that the increased scale and product and end market diversification would potentially drive stronger profitability metrics for a combined entity.

And SunTrust’s William Stein compared Broadcom’s M&A moves to “a game of chess,” and raised his price target from $281 a share to $325 a share.

Despite increasing complexity, and competitors’ and potential targets’ counter-moves, we believe CEO Hock Tan has thought several moves deep & has a track record that demonstrates his ability to use M&A to drive earnings…We believe AVGO’s M&A experience suggests it will, more likely than not, eventually close QCOM…We believe AVGO’s M&A experience suggests it will, more likely than not, eventually close QCOM .

Broadcom bid is a cash and stock offer — $60 a share in cash and $10 a share in its own stock. Stein says the deal could be 30% accretive to Broadcom’s free cash flow and per share earnings. But getting the deal done won’t be easy. Stein predicts “a long slog” with Qualcomm likely to reject the current offer owing to price and regulatory concerns. Broadcom would then nominate a slate of directors just as Qualcomm attempts to close its deal for NXP Semiconductors (NXPI).

How much Broadcom pays and how much accretion it captures remains to be seen, and could vary widely depending on whether Qualcomm’s deal for NXP goes through or if Broadcom pursues a different target.

But all the outcomes are good for Broadcom, Stein says.

… Investors should understand there is a wide range of potential outcomes, including a scenario where AVGO might pay $90/sh and still generate -6% EPS accretion, or a case where AVGO might pay $70/sh and generate 38% EPS accretion.

At $271.25 a share, Broadcom has fallen 2.26%, while Qualcomm is up 1.2% today to $63.29 a share on a day when the S&P 500 has inched 0.02% lower.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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