Broadcom's Shocking Attempt to Acquire Qualcomm
We will maintain our $203 fair value estimate for narrow-moat Broadcom for now, but we suspect that our valuation would rise if a deal were to go through.
Bloomberg and The Wall Street Journal reported late Nov. 3 that Broadcom is exploring an unsolicited acquisition of Best Idea Qualcomm in a deal that would be the largest, by far, in the history of the semiconductor industry. A subsequent Bloomberg update pinned the deal price at $70 per share, paid for with cash and stock, which implies that Broadcom will buy all of Qualcomm rather than simply the chip business. In our view, Broadcom's acquisition of Qualcomm's chip business, QCT, would make strategic sense, although there would be some overlap and market share concentration at the margins. Broadcom's ownership of Qualcomm's licensing business, QTL, makes less sense, as we think Broadcom would have little to add but a lot to lose if regulatory issues went south or the company were to reduce royalty rates under new ownership to appease its wireless customers and regulators. We also suspect that Broadcom would not continue with Qualcomm's pending acquisition of NXP but would rather retain Qualcomm's hefty cash cushion instead. We doubt that Intel or anyone else would try to outbid Broadcom at this point. We suspect this deal would face heavy regulatory scrutiny and some concessions would probably be needed, but we think there's a decent chance that such a deal can go through.
We will maintain our $68 fair value estimate for narrow-moat Qualcomm, which remains on our Best Ideas list and which we consider to be fundamentally undervalued. Based on the $70 proposed deal price, Broadcom would be acquiring an industry-leading company at an attractive valuation. We will maintain our $203 fair value estimate for narrow-moat Broadcom for now, but we suspect that our valuation would rise if a deal were to go through, since Broadcom is likely to benefit from synergies that will more than offset the small premium paid for Qualcomm (27% over Qualcomm's $55 stock price yesterday and only 3% above our $68 fair value estimate).
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