Qualcomm-Broadcom Merger Drama Heats Up Further

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The odds of a Qualcomm-Broadcom merger continue to run thin as Qualcomm takes even more defensive measures to try to fend off a takeover. Analysts believe the drama could come to a head at the shareholder meeting next month, but until then, the two chip makers are likely to continue their tense tango.

Qualcomm rejected Broadcom’s latest bid of $82 per share last week, which amounts to about $121 billion or a multiple of 11 or 12 times earnings. The average multiple in the semiconductor industry is 18 times earnings. Today Qualcomm lead director Tom Horton told CNBC that the bid is “just not even close to what the value of the company is.”

He argued that Qualcomm is worth more than what Broadcom is offering because the company is close to reaping all the benefits from its investments in 5G technology. He also noted that the maker of the Snapdragon line of processors has just sealed the buyout deal for NXP, which should boost its valuation even more. Qualcomm raised its bid for NXP to $127.50 per share, and analysts believe the main reason for that was to fed off the hostile bid from Broadcom, which had stipulated that Qualcomm not increase its bid for NXP.

Late last week, the influential shareholder advisory firm Institutional Shareholder Services weighed in on the Qualcomm-Broadcom merger. Credit Suisse analyst John Pitzer believes that the firm was attempting to stay in the middle on the takeover while also arguing that Qualcomm’s board members should be willing to come to the bargaining table, although they are not doing so.

ISS stated that Qualcomm’s board should negotiate in good faith with Broadcom and that the $82 per share offer isn’t “clearly” superior to the chip maker’s potential standalone value. The firm also weighed in on the directors that were nominated in an attempt to push the Qualcomm-Broadcom merger through. ISS believes that shareholders should vote for four of the six directors Broadcom nominated: Samih Elhage, Julie Hill, John Kispert, Harry You.

While some have been concerned about whether a Qualcomm-Broadcom merger would gain the approval of regulators, ISS isn’t concerned and believes that the risk is manageable. The firm also said that Qualcomm’s long-term core earnings per share view would be more believable if its track record were better.

Pitzer notes that passive funds own about 25% of Qualcomm. He feels that ISS struck a balance between supporting the Qualcomm-Broadcom merger without pressing for a board that’s mostly made up of directors nominated by the company that’s trying to take over. If Broadcom succeeds and takes a majority of the board seats, this could pose a problem for shareholders because the directors it nominates might be less interested in pushing it to a “best price.” On the other hand, Qualcomm’s current board doesn’t seem interested in trying to negotiate at all, leaving the takeover talks at a stalemate—for now.

The Credit Suisse analyst doubts that the Qualcomm-Broadcom merger battle can be resolved without the shareholder vote that’s scheduled for March 6. He believes that Broadcom stock works both with and without the Snapdragon chip maker.

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