Broadcom Ltd (AVGO) CEO Hock Tan heaped more pressure on the board of Qualcomm Inc. (QCOM) , with a sweetened buyout offer of $82 per share -- $60 in cash and $22 in stock. That was a 17% increase from its initial offer of with $70 per share -- $60 in cash and $10 in Broadcom stock.
Tan outlined terms of the proposal in a Monday letter to Qualcomm's board, and said the bid will expire after Qualcomm's March 6 shareholder meeting unless it has a definitive deal agreement or shareholders appoint the slate of directors that Broadcom nominated. The CEO also seemed to imply that Broadcom could drop the bid if Qualcomm gives in to Paul Singer's Elliott Management Corp. and increases its bid for NXP Semiconductors NV (NXPI) . Qualcomm faces a difficult couple of months as it tries to maintain control of its board and win over NXP shareholders.
Despite the increased bid, shares of Qualcomm dropped 6.6% to $61.73 on Monday, Feb. 5 amidst a broad market rout.
The decrease in Qualcomm's stock price and the increased bid may seem incongruous. However, the market is also digesting reports that Apple Inc. (AAPL) may replace Qualcomm's chips with components from Intel Corp. (INTC) in future phones.
Investors may also have expected a higher offer, given that Broadcom is potentially buying both Qualcomm and NXP.
"It's an aggressive bid for Qualcomm alone," Drexel Hamilton analyst Cody Acree said, noting that the stock hasn't traded at that level since the internet bubble. The equity value of Broadcom's offer comes to about $122 billion. Qualcomm's market price was close to $100 billion before Monday's drop, and NXP is valued at $40 billion. "If you put those two together, you've got $140 billion of market cap on an aggregate basis," he said.
Private equity firm Silver Lake is providing convertible debt financing for Broadcom's bid, which comes to about $122 billion for Qualcomm's equity. Broadcom has said that the target would have about $25 billion in net debt following the purchase of NXP, which would push the valuation to $147 billion.
Qualcomm complained in a January presentation that Broadcom's initial bid of $70 per share came to just 10 times fiscal year 2018 earnings per share, while the Philadelphia Stock Exchange's Semiconductor Sector Index trades at 19 times earnings, and comparable transactions have averaged 22 times earnings.
Broadcom says the new bid comes to 23.2 times Qualcomm's earnings for the next twelve months, which would put it above the average takeout valuation that Qualcomm cites.
However, the hostile suitor and target have vastly different figures for Qualcomm's earnings.
Qualcomm projects that fiscal year 2019 earnings will come to $6.75 to $7.50 per share. Broadcom cites the Wall Street consensus of $3.68 per share.
Stifel Nicholas & Co. analyst Kevin Cassidy suggested that earnings could reach $5.50 per share in fiscal year 2019, if Qualcomm achieves $1 billion in promised cost cuts and an acquisition of NXP is accretive. At that level, Broadcom's bid would come to 15 times earnings. If Qualcomm investors believe in management's earnings range, however, Broadcom's deal multiple is 12 times earnings.
"In our view, [Qualcomm] investors may base this final offer on [management's] earnings estimates, which may suggest a 12x forward earnings is too low," Cassidy wrote.
Qualcomm said it would review the bid with its financial advisers, which include Goldman, Sachs & Co., Evercore and Centerview Partners, and legal advisers Paul, Weiss, Rifkind, Wharton & Garrison LLP, Cravath, Swaine & Moore LLP and DLA Piper LLP.
Broadcom called the deal its "best and final" offer. The company said it would pay a termination fee "appropriate for a transaction of this size," which Raymond James analyst Chris Caso suggested in a report would be around $10 billion. Broadcom would pay more if a deal does not close in 12 months.
Tan's letter warned that Broadcom would walk away after the March 6 meeting unless the parties enter a definitive agreement or shareholders vote in Broadcom's directors. The bid presumes that Qualcomm not adjourn its March 6 meeting, and that it either buys NXP at $110 per share or terminates the deal.
The letter does not, however, say exactly what Broadcom would do if Qualcomm increases its offer for NXP, Sanford C. Bernstein & Co. analyst Stacy Rasgon pointed out in a Monday note.
"The ambiguity is likely deliberate in our opinion as it could conceivably be read that [Broadcom] will walk if [Qualcomm]increases their bid for NXPI, putting QCOM under even more pressure," Rasgon noted. "And with [Broadcom] making the March 6 shareholder date a hard stop, [Qualcomm] is going to have to make a choice, and come to terms with NXPI shareholders (who are not going to take $110) very soon."
Shares of NXP closed Monday at $118 a share and have traded even higher, suggesting that Elliott and other investors don't plan on accepting the $110-per-share offer.
If Qualcomm is dead set on remaining independent and buying NXP, it could appease Elliott and possibly make Tan go away by increasing its bid.
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