For those of us not obsessed with porn stars and Russia investigations, the big news yesterday was the intervention by the White House to block the proposed takeover of Qualcomm (QCOM) by Broadcom (AVGO). The hostile takeover bid had, as these things tend to do, become extremely contentious, but is now over due to a ruling by President Trump that the deal would potentially damage national security.
The ultimate decision was made by President Trump, but the deciding factor was a review by the Committee on Foreign Investment in the U.S. (CFIUS). As a result, Broadcom cannot now buy Qualcomm, but the fact remains that they saw they saw substantial value in the stock, so maybe you should.
Of course, it is never quite that simple, but failed takeovers often indicate value in the target company that is understood by a company in the industry but not priced in by the market. Even after you factor in the inevitable synergies of such a deal, Broadcom obviously saw value in QCOM at or above the current price. That is in part because Qualcomm has been, in the eyes of many, underperforming for a while.
However, history shows that when that is the case a hostile takeover bid can be a wonderful motivation for a Board to make some positive changes, and the target stock often does well in the following months.
As an example, back in 2014 when the pharmaceutical industry was in an M&A frenzy and inversions were all the rage, a proposed takeover of the U.K. firm Shire PLC (SHPG) by AbbVie (ABBV) fell apart. As a result, SHPG dropped dramatically, but, as I pointed out at the time, the value beyond the benefits of inversion that AbbVie saw in Shire didn’t go away. That is why SHPG did this over the next nine months.
There is already evidence that the takeover bid has refocused the existing board at Qualcomm and improved the company’s prospects. They have become more aggressive about their own potential takeover of NXP (NXPI), for example, and made a few other moves that improve the prospects for growth in the business.
There is still the matter of their dispute with Apple (AAPL) over licensing fees, but, as this Seeking Alpha piece by Mark Hibben points out, a dispassionate view of the agreement makes that look like a standard licensing deal, so an eventual ruling in Qualcomm’s favor is the most likely outcome.
The beauty of buying QCOM at a discount as the deal collapses, however, is that you do not need a complete win on the Apple dispute or a massively successful deal with NXP to make the trade make sense. The current price reflects the risk inherent in both situations but also the relative underperformance to this point, and as a result the trailing P/E (after adjustments for one-off charges) on the stock is around fifteen as compared to the S&P 500’s multiple of over twenty-five.
In other words, bad news is priced in at these levels and QCOM therefore represents rare value in what is currently a rapidly growing industry. Trump’s decision yesterday means that Broadcom can’t buy Qualcomm, but, given the inherent value and possibility of good news in the near future, maybe you should.