Qualcomm (QCOM) Rejects Broadcom's $130B Takeover Offer

Qualcomm Inc’s (NASDAQ:QCOM) board of directors rejected the recent $130-billion (includes $25 billion of net debt) takeover offer by Broadcom Limited (NASDAQ:AVGO) . Qualcomm turned down the offer on grounds of inadequacy as it is currently a leading player in the chipset market.

Notably, Qualcomm has a market cap of around $95.2 billion against which Broadcom’s paltry $105-billion offer is quite disappointing. Also, Qualcomm is uncertain about getting regulatory support for the proposed deal.

The proposal was forwarded on Nov 6, 2017, wherein Broadcom offered to acquire Qualcomm’s outstanding shares for a consideration of $60 in cash and $10 in Broadcom stock.

Qualcomm currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Chipset Sales Drive Growth

Qualcomm’s updated Snapdragon processors and applications have helped the company retain leadership in the global wireless baseband chipset market. Qualcomm is teaming up with Verizon Communications Inc (NYSE:VZ) and Novatel Wireless for 5G NR mmWave technology trial. This marks Qualcomm’s leadership in 5G, chipset market and mobile connectivity.

Moreover, the company’s foray into areas like automotive, networking and mobile computing are favorable for prospects within the semiconductor industry. Such strategic business moves can be attributed to the shipment of approximately 220 million chipsets (up 4.1% year over year). This was also above the midpoint of 215 million, which was the fourth-quarter chipset outlook issued previously by management.

The company is also confident about its ability to create significant additional value for stockholders, on the back of continuous growth in segments and the transition to 5G network.

Legal Disputes Weigh on Qualcomm

Qualcomm has been facing regulatory proceedings of late. The company continues to receive charges for unfair business practices and licensing royalty payments. In May 2017, Qualcomm settled a licensing dispute with BlackBerry Limited by paying $940 million. In December 2016, South Korea's regulatory authority for economic competition, Korea Fair Trade Commission (KFTC), imposed an administrative fine of approximately 1.03 trillion South Korean Won (approximately $865 million) on Qualcomm due to unfair business practices. Meanwhile, the ongoing $1-billion lawsuit dispute with tech giant Apple Inc. (NASDAQ:AAPL) continues to get bitter with time, which is affecting the company’s margins.

Accordingly, Qualcomm’s fourth-quarter 2017 GAAP earnings plummeted 90%. The company's fourth-quarter revenues dipped 5%. Qualcomm’s full-year revenues fell 5% to $22.3 billion. Additionally, full-year earnings per share on a GAAP basis declined 57% to $1.65. Notably, its ongoing dispute and the related actions undertaken by Apple and its contract manufacturers have affected the company’s third and fourth quarters as well as fiscal 2017 GAAP and Non-GAAP results. Moreover, the previously disclosed dispute with another licensee, who failed to pay royalties due in the second quarter of fiscal 2017, has affected the company’s margins. Qualcomm expects these licensees to continue to take such actions in the future until the disputes are resolved.

Bottom Line

Broadcom’s successful takeover of Qualcomm might have been the biggest tech deal. The combination of Broadcom and Qualcomm would have created the world's third-largest semiconductor company, lagging Intel Corporation (NASDAQ:INTC) and Samsung (KS:005930).

We believe Broadcom might have to raise the value of the buyout offer to impress Qualcomm’s shareholders. We currently await updates on this front if Broadcom raises its offer or engages in a proxy battle with Qualcomm.

Price Performance

Qualcomm portrays an impressive price performance. In the past three months, shares of the company have returned 23.4% compared with the industry’s gain of 4.5%.

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