The dealmaking may be just getting started.
As was widely expected, Broadcom Ltd. (AVGO - Get Report) unveiled a $70-per-share offer for rival chipmaker Qualcomm Inc. (QCOM - Get Report) on Monday. And although Broadcom laid out a set of arguments for pursuing the deal, there's still no shortage of potential outcomes that the move creates -- both for Broadcom and Qualcomm, and for peers.
I previously looked at three important questions raised by Broadcom's bid: How antitrust regulators would view the deal, what a successful Broadcom bid would mean for Qualcomm's giant royalty dispute with Apple Inc (AAPL - Get Report) and what the deal implies for Qualcomm's planned acquisition of NXP Semiconductors NV (NXPI - Get Report) .
Broadcom's offer announcement did state that its bid will remain valid if the Qualcomm/NXP deal is closed at its current $110-per-share deal price, or if the deal is terminated. But with NXP investors pushing for a higher purchase price and less than 5% of NXP shares tendered to Qualcomm at $110 so far (80% are needed), Broadcom's remarks don't settle a whole lot. The company doesn't say how it will act if Qualcomm revises the NXP deal to feature a higher price, or if the deal remains in limbo, for example.
A Broadcom-Qualcomm deal that also covers NXP would create a chip industry giant.
The NXP saga provides one of several other big unknowns as Broadcom pushes ahead with its bid, which Qualcomm is widely expected to reject as insufficient. In the near-term, as Broadcom and Qualcomm try to maneuver, it's worth asking the following big questions:
1. Does Qualcomm try to quickly close the NXP deal at a higher price in order to deter Broadcom?
Even if it managed to get Qualcomm at $70 per share and NXP at $110, Broadcom's total bill would stand at a whopping $130 billion after accounting for $25 billion in net debt. And of that total payout, about $115 billion consists of cash.
To be fair, Broadcom's long and successful M&A track record has earned it some goodwill with bankers, and Qualcomm and NXP's low valuations and strong cash-flow profiles provide the company with some leeway to pursue a mega-deal. Still, it's fair to question whether Broadcom, which currently sports a $112 billion market cap and already has over $12 billion in net debt, can afford to add about $115 billion in debt (not counting potential asset sales) to its balance sheet.
But if you take NXP, which at $110 per share would cost $47 billion in equity and net debt to acquire, out of the equation, then suddenly the Qualcomm deal becomes easier to pull off. Indeed, by only promising to buy NXP at current deal terms, Broadcom might be hoping for such an outcome.
But that gives Qualcomm, which plans to partly pay for NXP via offshore cash and for whom the deal would be very accretive even at a somewhat higher price, an incentive to quickly appease NXP shareholders and close the deal ASAP. Do that, and Broadcom could be staring at a debt bill of around $120 billion.
In turn, Broadcom could respond to this by upping the stock portion of its payout to Qualcomm shareholders. But adding even, say, $100 billion in debt would be no mean feat.
2. Do Qualcomm investors pressure the company to negotiate?All signs point to Qualcomm, whose shares traded above $70 for much of 2014 and early 2015, rejecting Broadcom's offer as insufficient. Bloomberg reports that if this happens, Broadcom will go hostile with its bid, appealing directly to Qualcomm shareholders.
Considering that Broadcom's offer amounted to a 27% premium to Qualcomm's close the day before reports of a bid arrived, it's easy to imagine Qualcomm investors pushing the company to negotiate. Particularly if major progress isn't made in Qualcomm's royalty disputes with Apple and another big licensee (possibly Samsung (SSNLF ) -- disputes that have led the licensee and Apple's contract manufacturers to halt billions in royalty payments.
For now, Qualcomm still trades about 10% below Broadcom's offer price. Should shares continue trading well below $70, activists seeing an opportunity to make some quick money could jump in.
And here are three possibilities to consider if Broadcom succeeds in reaching a deal to buy Qualcomm.
3. Will Intel's mobile and/or server chip businesses face more competition?
After years of solely relying on Qualcomm for its iPhone modem needs, Apple started using Intel Corp. (INTC - Get Report) modems within some iPhone 7 models, and continued this practice with the iPhone 8 and X. And recently, reports emerged that Apple is thinking about not using Qualcomm modems at all within its 2018 iPhones and iPads, as the two companies' royalty battle rages on.
But if Broadcom, which already counts Apple as its largest customer and supplies RF chips, among other things, that Apple could be hard-pressed to obtain from another source, is able to reach a royalty settlement with Apple, the iPhone maker might be partial to solely relying on Qualcomm modems again. That's especially since Qualcomm high-end 4G modems retain a performance edge against rival parts.
Separately, Broadcom's status as a major supplier of Ethernet, storage and optical chips and components to server OEMs could help it sell some of those OEMs on end-to-end solutions that feature Qualcomm's ARM-based Centriq server CPUs. That, in turn, would spell tougher competition for Intel's Xeon server CPU line. But unlike the 4G modem market, Intel is the dominant player in server CPUs and retains quite a few competitive strengths.
4. What Qualcomm and NXP assets does Broadcom try to sell off?
Broadcom often tries to make big acquisitions easier to digest by divesting businesses it's not crazy about for strategic and/or competitive reasons. Its pending $5.9 billion purchase of Brocade Communications Systems Inc. (BRCD , for example, is accompanied by deals to unload most of Brocade's non-storage networking businesses.
Should it succeed in buying Qualcomm, chances are that Broadcom would try to unload much or all of Qualcomm's Wi-Fi/Bluetooth/GPS connectivity chip business. That due both to the overlap with Broadcom's connectivity chip business, and the fact that regulators probably wouldn't be thrilled to see Broadcom buy it. And if NXP is bought, it's possible that Broadcom would try to unload NXP's smart card and payment card micro-controller business, which faces pricing and competitive pressures and is likely less appealing than NXP's automotive, mobile and IoT chip businesses.
Another possibility is that Broadcom would divest Qualcomm's stake in an RF filter chip JV with Japan's TDK. But since there isn't a lot of overlap with Broadcom's existing RF filter lineup, that's not a given.
5. Will Intel or another chipmaker now bid for Skyworks or Qorvo?
Broadcom RF chip rivals Skyworks Solutions Inc. (SWKS - Get Report) and Qorvo Inc. (QRVO - Get Report) each posted healthy quarterly gains on Nov. 6, as speculation swirled that the companies could take part in a fresh round of chip industry M&A. Intel is one possible suitor -- buying Skyworks or Qorvo would both grow the company's mobile and IoT exposure and allow it to offer a more comprehensive product line to smartphone OEMs.
Major suppliers of analog chips and microcontrollers to the automotive and IoT markets, such as Texas Instruments Inc. (TXN - Get Report) and Analog Devices Inc. (ADI - Get Report) , could also see product synergies. The fact that Skyworks and Qorvo still sport pretty reasonable valuations certainly doesn't hurt their M&A prospects. But in Skyworks' case, the fact that the company is now worth $21 billion does limit the number of potential buyers.
But what does Broadcom actually do?
Jim Cramer and the AAP team hold positions in Broadcom, Apple and NXP for their Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells AVGO, AAPL or NXPI? Learn more now.
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