Broadcom Limited (AVGO) announces a hostile bid o $70 per share or a $130 Billion deal To Buy Qualcomm (QCOM) in what could be the largest Tech Acquisition ever. This was reported last week by CNBC, and the bid was made official today with a press release. According to CNBC, Broadcom is adamant about this mega-merger and is prepared for a proxy fight in that regard. What are the implications for both companies (besides synergies of course) and the wider industry? See below for analyst reactions to the latest news.
First on the earnings angle and a different deal
Tim Long of BMO opines:
NXPI. Qualcomm has approval from five of the nine necessary jurisdictions for the NXPI acquisition, with the largest remaining regions being China and the EU. Management believes the deal can close by the end of CY17, though there is potential for slippage into early 2018, consistent with recent comments made by NXPI management. We believe shareholders may be reluctant to tender at the proposed $110 share price, however.
Stifel on the dispute with Apple
It is important to note that in this complaint Qualcomm has not alleged that Intel chips violate its patents, but rather the way Apple uses this IP in the iPhone, in which we think the ITC should consider the potential antitrust ramification. In late July the Computer & Communications Industry Association (which represents large tech companies including Amazon, Facebook, Google, Intel, etc.) lodged a formal letter in opposition of Qualcomm’s ITC request – citing a ban of Apple’s use of Intel modems would result in monopolistic behavior by Qualcomm and potentially result in significant shocks in supply to the smartphone market.
Multiple news agencies have reported that AVGO may make an offer to acquire QCOM for $70 per share, even as QCOM is in the process of trying to acquire NXPI for $110 per share. There are many permutations of potential outcomes, and our sensitivity analysis considers 9 scenarios of pricing and combinations of targets.
Below is one scenario mentioned by Jefferies
Assuming AVGO acquired both QCOM and NXPI, we estimate that its EPS accretion would be 38%-to- 42%, and that its leverage ratio would expand to 4.7x-5.2x
We believe a QCOM takeover could place the QCOM/NXPI deal in jeopardy. NXPI doesn't fit in AVGO's historical target model. Combined with a lower GM profile, diverse end-markets/products and broad customer base drive higher OPEX. While AVGO could look to spin off pieces of NXPI, we don't believe the $2B breakup fee (<2% QCOM marketcap at $70), holds up any potential deal.
Why this deal would make sense. We anticipate this deal would make sense, as: (1) We see an opportunity for AVGO to extract significant cost synergies. AVGO would look to divest or halt any R&D development on any emerging technology project, such as ARM servers, as was done at BRCM. In our analysis, we estimate 35% in Opex savings associated with this acquisition. (2) We anticipate AVGO would leverage its healthy relationship with Apple to make amends and settle the strife between QCOM and AAPL by divesting QTL and would look to recover its baseband share in the iPhone, which is currently 50%. In our view, QCOM's baseband is clearly superior and believe that Apple would look to source the majority of its BB from QCOM if it weren't for the lawsuit.
Importantly, we believe Broadcom would encourage Qualcomm to complete the acquisition of NXPI for several reasons: 1) NXPI has extensive distribution channels; 2) scale; 3) and exposure to the fastest growing segments in automotive, where Broadcom is underpenetrated. We estimate that on a combined basis wireless would account for 59% of revenue, wired 17% of revenue and automotive and industrial 9% of revenue.
We see AVGO as a FCF and EPS maximizer, so view the business combination as tactically sensible. From a strategic perspective, we highlight AVGO's longstanding approach to acquiring leading franchises, substantially reducing G&A and focusing R&D to deliver profitable growth. This transaction would fit that bill. However, from an end markets concentration perspective, it's a little less attractive. Since we began covering AVGO, one major investor concern has been the company's exposure to the volatile handset market (~30% of sales).
As QCOM has ~90% of sales from the handset market, it would take the combined company's exposure to ~65% of sales, potentially challenging our view that AVGO deserves an expanded P/E.
Not much disagreement on the sell-side but what do you think? Comment below!