Qualcomm stock surged after it was reported that the chip maker has turned down Broadcom’s takeover offer. In a statement announcing that Qualcomm rejected Broadcom, the company said the board decided that the bid “dramatically” undervalues it.

qualcomm rejected broadcom
See page for author [Public domain], via Wikimedia Commons

Qualcomm rejected Broadcom offer

Broadcom announced that it will work with Qualcomm’s management and board of directors. The company also said that major stockholders and customers gave positive feedback on its $103 billion bid for the maker of the Snapdragon line of processors. Broadcom said in a statement that it still believes its bid is “the most attractive, value-enhancing alternative available to Qualcomm stockholders.”

Broadcom entered its unsolicited bid for Qualcomm last week. Now that Qualcomm rejected Broadcom, the next step could be either a proxy battle or a higher bid. However, the statement highlighting how supportive shareholders were could suggest that Broadcom is leading in the direction of a proxy fight. In fact, Loop Capital analyst Betsy Van Hees told Reuters that she would be surprised if the company didn’t choose that route.

However, Qualcomm could try to convince shareholders that it can create more value for them separate from Broadcom, according to analyst Chris Caso of Raymond James.

What analysts have to say about Qualcomm and Broadcom

Some analysts have suggested that a tie-up between the two companies could help Qualcomm resolve its ongoing legal battle with Apple over royalties because Broadcom lists the iPhone maker among its customers as well. In fact, Broadcom’s relationship with Apple is even closer than Qualcomm’s, especially now. The chip maker was hugely unhappy when the iPhone maker started using Intel modems in some of its newer models, which sparked the legal battle. Now there are reports that Qualcomm could be out of the picture entirely for next year’s iPhone models.

According to CNBC, Qualcomm’s governance rules allow a company that enters a hostile bid to submit a slate of board nominees for all 11 seats by the Dec. 8 deadline. That could set the stage for a hostile takeover.

Some analysts insist it makes sense that Qualcomm rejected Broadcom on the first attempt because it could get more money out of the deal. For example, Susquehanna analyst Christopher Rolland told Reuters that Qualcomm should be valued at $80 to $85 per share and that Broadcom could raise its bid as high as $90 per share. Based on that valuation, it’s easy to understand why Qualcomm rejected Broadcom because the latter’s offer was $70 per share.

Bernstein analyst Stacy Rasgon believes the fact that Qualcomm rejected Broadcom doesn’t mean the chip maker won’t deal. He estimates Qualcomm’s worth at “$80ish” per share. However, he agrees that the potential exists for “a fully-hostile bid,” based on Broadcom’s response and the fact that Qualcomm’s board nomination deadline is nearing.

Canaccord Genuity analyst Michael Walkley boosted his price target for Qualcomm stock from $76 to $83 per share because he expects a higher bid.

Antitrust regulators could halt the deal

However, antitrust regulators might block a combination between the two chip makers. At the very least, they would carefully scrutinize any possible deal because the combined firm would dominate the high end of the Wi-Fi component business. Antitrust regulators are already considering Qualcomm’s planned $38 billion buyout of NXP Semiconductors, which makes chips for vehicles.

Qualcomm stock surged by as much as 2.58% to $66.23 during regular trading hours on Monday while Broadcom stock was little changed at around $263.98 per share.