Qualcomm: A Win-Win

Summary

• Qualcomm remains steadfast in its NXP deal.
• However, determining whether that’s a positive or negative is another story.
• Qualcomm is losing support while activist investors gain momentum.

Qualcomm (NASDAQ:QCOM) shares are flat over the last year, as Apple (AAPL) has filed a lawsuit and the company is struggling to get its deal for NXP Semiconductors (NXPI) done. Shares of Qualcomm now trade at 14 times next year’s earnings. Granted, Qualcomm has been cheaper in the past, trading at less than 10 times forward earnings in 2016. NXP could be the needed growth driver for Qualcomm. Yet, investors are holding NXP hostage.

Qualcomm is a chip-making giant. It battled activist investor JANA Partners and resisted a breakup. But the silver lining is that Qualcomm could find new growth areas with the NXP buyout. The key is, how much will Qualcomm have to pay to get the NXP deal done. Qualcomm has offered $110 a share. The activist investor, Elliott Management, has gotten involved and is pushing for a better deal for NXP.

At the March offer update - where investors can offer up their shares for $110 per share in cash, 17.2% of NXP’s total shares were tendered. In May that number was down to 14.9%. And now with activists and hedge funds pushing harder, the number was down to 12.5% at the June 28 update. Qualcomm needs 80% of shares tendered to close the deal.

The key for Qualcomm is knowing that it needs this deal. It’ll give the company some much-needed diversification beyond the potentially topping smartphone market. It’s a win-win and even if Qualcomm has to boost its offer price to $125 a share, it still gets a decent deal. Shares of NXP trade at 15 times forward earnings and at $125, NXP is still at just 17 times - and still a discount to Texas Instruments (TXN).

The legal battles and need to diversity should push Qualcomm into getting a deal done. Paying a higher premium for NXP won’t jeopardize Qualcomm’s balance sheet and should be a net positive in the interim. However, Qualcomm has stood fast with its $110 offer for nearly half a year, so the risk that the merger talks crumble is very real. In that case, both stocks would fall.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.