Qualcomm walks tightrope between independence and capitulation

We usually put ourselves on the line and make a call over the outcome of events, but increasingly the Broadcom takeover of Qualcomm is becoming a tough call, which could go either way and every story about the pair is seen through the prism of that impending deal.

On the one hand Broadcom this week upped its offer for Qualcomm to $82 a share – amounting to about $121 billion, up from $105 billion or $70 a share. On the other Qualcomm cut a repeat cooperation deal with Samsung to see it through 5G and it revised the terms of its patent agreement with Samsung, so that it will withdraw its complaints to the Korean High Court, potentially helping it win its appeal there.

No one can deny that Qualcomm’s profits and revenues are currently depressed and that the Broadcom intervention, unwelcome as it is to the people who work at Qualcomm, may represent a way of investors washing their hands of the issues which surround Qualcomm and which have surrounded it for most of its life – including very high IPR charges which has now resulted in more regulatory fines as well as the legal woes it has with Apple.

The other issue here is whether or not Broadcom can acquire the company, keep the key staff it needs, slash costs to the bone, by basically firing everyone it does not need and eliminating R&D, and change the way the company does business so that Apple comes back into the fold, at enough of a revenue level to make it all worthwhile. We sincerely do not think so, but it is not what we think, but rather what the shareholders feel.

The $82 is enough for arbitragers to already be active in the stock, and yet, the share price has hardly lifted on the news of the higher offer and sits at around $65. That’s a surefire clue that not many people think this deal is likely enough to go through or that it’s worth getting out of bed to buy the stock and there has not been a huge amount of activity in the stock.

If the Qualcomm management wanted to see off the Broadcom deal, it has issued two no-nos – one that it does not delay its shareholder meeting in March, and two that it does not offer more for NXP. And the Qualcomm board has had this offer for a few days, and so far said nothing – but it could choose to up the offer for NXP, or change the meeting date, to send a signal to Broadcom. But it hasn’t

Meanwhile both companies reported their annual results and both were in line with or better than expectations. If we had to make a call, we think that Broadcom will likely lose its nerve first – if there are more sell offs in the US stock market, as there was the other day, based around wage inflation, the price Broadcom is paying for Qualcomm will seem increasingly high to those funding it. So while we won’t really know until March, unless Qualcomm gets a sense that too many investors have thrown in their lot with Broadcom, our sense is that this is too much of a concentration in too few hands and it probably won’t go ahead. Maybe.