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On March 5, the effort by Broadcom Ltd (NASDAQ: AVGO ) to take out Qualcomm, Inc. (NASDAQ: QCOM ) for $82 per share was interrupted by the U.S. government.
The Committee on Foreign Investment in the United States (CFIUS) asked Qualcomm to delay its March 6 shareholder meeting for 30 days so it could examine how the deal might impact national security.
The move was a surprise, because Broadcom CEO Hock Tan said that he plans to move his Singapore-based company to the U.S. after completing the takeover. He even appeared in the Oval Office last November alongside the President . At the time, the deal fit the Trump Administration's narrative of bringing jobs to the U.S.
But now, thanks in part to Qualcomm lobbying, all that may have been for naught.
Qualcomm has been fighting the against Broadcom's hostile takeover ever since it was first announced in November with an unsolicited offer that valued it at $70 per share.
Last month, Qualcomm moved to scuttle the deal with a sweetened bid to buy NXP Semiconductors NV (NASDAQ: NXPI ), the Dutch-based maker of chips for digital signal processing. Broadcom does not want this. (In fact, Tan had said an increased bid for NXP would end Broadcom's attempts to buy out Qualcomm.)
The new bid, $127.50 per share, quickly won approval of hedge funds that had previously opposed the merger. NXPI is currently trading around $125 per share, close to that strike price.
The idea was that if Qualcomm can close on NXPI over the next 30 days, the Broadcom offer would become moot.
Qualcomm plus NXPI would have a market cap of nearly $140 billion. Broadcom has a market cap of $101 billion and was already stretching to make its latest Qualcomm bid - which valued Qualcomm at $121 billion. The market currently values Qualcomm at $93 billion.
The big losers, other than Broadcom, are those who bought Qualcomm stock in hopes of selling it on to Broadcom for a quick profit. Qualcomm is currently down to $62.50 - many investors saw the NXPI price was seen sapping QCOM's own resources.
The big prize - and the reason the government says it is getting involved - is 5G technology.
Qualcomm controls much of the intellectual property for mobile telephony. Many consider QCOM the key to delivering on the promises of 5G, which could deliver wireless service as fast as wires now deliver. This would create more market competition among Internet Service Providers. 5G would also deliver enough bandwidth for artificial intelligence, self-driving cars and other technological miracles of the 2020s.
The San Diego Union-Tribune , which serves Qualcomm's headquarters, called the CFIUS review a "welcome reprieve" in a March 5 editorial . Broadcom had put up a slate of 6 new directors for the original March 6 meeting. And their election would have given it a majority of the Qualcomm board.
The editorial repeated the view of some deal opponents, that Broadcom is Singapore-based and that the takeover of 5G assets by a Singaporean company could allow them to benefit Chinese interests more than the U.S.
This contradicts the picture from November, of Tan promising to personally move to the U.S.
But note that Tan was moving to San Jose.
The deal would cut the heart out of San Diego's tech sector, and San Diego lawmakers were among those that asked CIFUS to investigate the deal. So it's state politics, not international politics, that may end the Broadcom-Qualcomm saga.
The Bottom Line
Qualcomm says the NXPI deal will bring it big profits over time as 5G services are rolled out over the next five years, and self-driving cars become a reality. Broadcom says its bid represents a huge profit to current Qualcomm shareholders.
At its March 6 opening price, Qualcomm was trading for about 4.5 times sales and 48 times a normal year's earnings. It currently has no price to earnings ratio because the board decided to take a charge of $5.4 billion in the fourth quarter, in preparation for the Trump tax cut. That money, and more, should come back to it over the next year.
It's hard to see how investors in Qualcomm can go wrong. And buying ahead of a profit's reality is usually a very good move.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time , available now at the Amazon Kindle store. Write him at firstname.lastname@example.org follow him on Twitter at @danablankenhorn . As of this writing he owned no shares in companies mentioned in this article.
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