Why Broadcom's (AVGO) Bid for Qualcomm (QCOM) is a Dud

Common sense would prevail when wondering why Broadcom’s (NASDAQ: AVGO) $88/share bid for Qualcomm (NASDAQ: QCOM) is not giving the latter company’s stock a boost. Markets are skeptical that Broadcom would even get past regulators. Even if it did, markets are signaling that Qualcomm’s management will put up a fight before it gets bought out.

Qualcomm closed at below $65, well below the $88 offer price. Management did meet with Broadcom on Feb 15 or 16 if only to signal to its shareholders that it entertained a light discussion with Broadcom. But Qualcomm knows its fair value is over $90 a share. Its revenue and profits are artificially lower because Apple (NASDAQ: AAPL) refuses to pay the royalty it agreed upon with Qualcomm. Apple is arguing the royalty rates should be lower and is asking courts to decide. While the disagreement awaits judicial decision, QCOM earnings will be under-stated.

In the meantime, Qualcomm is developing 3D Sensors with Himax Technologies (NASDAQ: IMX), embracing 5G technology and working on completing its deal for NXP Semiconductors.

Takeaway

CEO Hock Tan of Broadcom may very well be bluffing. Unless he raises his bid for QCOM stock, management will not take the buyout offer. Even after that hurdle, QCOM/AGO/NXPI have a high hurdle to cross with regulatory approval.

QCOM’s deal with buying NXPI should eventually close, giving the combined, stronger company a competitive place in the world of semiconductor chips in the smartphone market.