(Note: the company formerly known as Avago agreed to buy Broadcom for $37 billion in mid-2015. Avago retained its ticker symbol: AVGO, but took on the Broadcom name. Hence, the mismatch between name and ticker. That deal is on the verge of closing now. Presumably AVGO’s recent decision to move its corporate headquarters from Singapore to the US is a condition for approval by Washington.)
AVGO and QCOM
AVGO is a company that has very successfully grown by acquisition (my family and I have owned shares for some time). Its specialty, as I see it, is to find firms with excellent technology that are somehow unable to make money from either their intellectual property or their processing knowhow. AVGO straightens them out.
QCOM, a firm I’ve known since the mid-1990s, seems to fit the bill. The company makes mobile processors for cellphones. It also collects license fees for allowing others to use its fundamental and important cellphone intellectual property. QCOM has been in public disputes over the past couple of years with the Chinese government, which has forced lower royalty payments, and with key customer Apple, which is threatening to design out QCOM chips from its future phones. As I see it, these disputes are the reason the QCOM stock price has stagnated over the recent past.
AVGO is offering $70 a share in cash and stock for QCOM, a substantial premium to where QCOM shares were trading before rumors of the offer began to circulate. The current price for QCOM (I’m writing this at around 10:30) of $63.90 suggests that the market has doubts about the chances for AVGO’s success.
Standard tactics would be for QCOM to seek another buyer, one that would keep current management in place. Since an overly pugnacious management has arguably been QCOM’s main problem, my guess is that a second bidder is unlikely to emerge.
If I were to try to participate in this contest (I don’t think I will), it would be to buy more AVGO. I believe AVGO’s assertion that the acquisition would be accretive in year one. So it’s likely to go up if the bid is successful. If not, downward pressure from arbitrageurs would abate. On the other hand, I don’t see 10% upside as enough to take the risk QCOM will find a way to derail the bid. After all, it has already found a way to anger Beijing and 1 Infinite Loop.
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