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Stock Analyst Update

Broadcom Makes $130B Unsolicited Bid for Qualcomm

We would probably raise our fair value estimate for Broadcom--perhaps as much as 25%--if a definitive deal were reached.

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On Nov. 6,  Broadcom (AVGO) announced an unsolicited bid to acquire  Qualcomm (QCOM) for $70 per share ($60 in cash and $10 in stock) in a deal valued at $130 billion, assuming that Qualcomm's ongoing bid to acquire NXP Semiconductors for $38 billion goes through. We refer investors to our Nov. 3 note, written after Bloomberg and The Wall Street Journal surfaced rumors about the potential bid, but in short, we see a sound strategic rationale for such a deal, and the financial component is especially attractive for Broadcom because we value Qualcomm at $68 per share on a stand-alone basis. We will maintain our fair value estimates of $68 for narrow-moat Qualcomm and $203 for narrow-moat Broadcom, but we would probably raise our fair value estimate for Broadcom--perhaps as much as 25%--if a definitive deal were reached.

Perhaps the most important new news on the bid is that Qualcomm is expected to reject this deal as it undervalues the company. Since we now view Qualcomm as fairly valued at best after the bid, we don't necessarily believe that investors need to cash out on this news. While the deal might be massively accretive to Broadcom, we also expect this management team to be disciplined, so while we might see modest raises from here, we don't foresee a bidding war.

We note that Broadcom's bid is independent of Qualcomm's success in closing its bid for NXP. We think NXP would also fit in reasonably well under the Broadcom umbrella, but we're surprised that Qualcomm's cash hoard isn't a requirement to fund Broadcom's bid. Reports suggest that Broadcom would not go over Qualcomm's offer of $110 per share to acquire NXP, so it may add urgency to NXP investors to close the deal after all.

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Brian Colello does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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