Conquering Those Qualms: Broadcom Makes Bid For Qualcomm

Broadcom-Qualcomm deal Apple patent dispute may hold the key

The $70 a share cash/stock deal represents a 28 percent premium over Qualcomm's November 2 closing stock price just prior to media speculation about the offer. It would raise the stakes for Intel Corp, which has been diversifying from its stronghold in computers into smartphone technology by supplying modem chips to Apple Inc.

And SunTrust's William Stein compared Broadcom's M&A moves to "a game of chess", and raised his price target from $281 a share to $325 a share.

Despite a 16% spike in Qualcomm shares since initial reports of the proposed deal, traders are still paying the highest premium in more than two years to bet on a further increase, relative to hedges against stock losses.

Qualcomm sells modem chips that allow phones to send data as well as communications chips for automobiles that handle "infotainment" systems and wireless electric vehicle charging. However, a combined company would also likely have a lower cost base and the flexibility to cut prices.

"Based on what I've seen, it seems unlikely to me that there's a basis for a challenge (to stop the deal)", he said.

Qualcomm is no stranger to acquisition either, and is now trying to buy NXP Semiconductor.

Qualcomm may be willing to do whatever it takes to repel Broadcom's $103 billion hostile takeover, but stock investors remain bullish on a deal getting done. Silver Lake Partners, which has served as a strategic partner to Broadcom in prior transactions, has provided Broadcom with a commitment letter for a $5 billion convertible debt financing in connection with the transaction.

The lack of royalty payments coming in is also doing damage to Qualcomm's bottom line, with the most recent earnings report showing a 90 percent drop in profits compared to the same quarter a year ago. The stock soared Friday, closing at $61.81 after The Wall Street Journal reported that Broadcom was considering a bid. Jeffrey Henderson, another Qualcomm board director, was added past year as a compromise candidate.

It's possible that traders are being encouraged by Broadcom's aggressive approach to the takeover.

Broadcom plans to move its headquarters exclusively to the United States, which would allow it to avoid review by the Committee on Foreign Investment in the United States, which reviews foreign ownership of US assets. Apple filed a U.S. lawsuit in January accusing Qualcomm of abusing its market power for certain mobile chipsets to demand unfair royalties, and has also joined efforts in other countries where Qualcomm faces probes from antitrust authorities.

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