Qualcomm investors want at least $10 more per share from Broadcom

Bloomberg

Qualcomm Inc. investors want at least $10 more than the $70-a-share Broadcom Ltd. is offering. If history is any guide, they might get partway there.
“We would be very interested in evaluating an offer that begins with an 8,” said Daniel O’Keefe, a fund manager of the $3.1 billion Artisan Global Value Fund, which owns Qualcomm stock. The board “should urge Broadcom to come back with a higher bid.”
Qualcomm’s board rejected Broadcom’s $105 billion acquisition offer on November 13, saying it was too low. Broadcom, which hasn’t yet improved its proposal, said it remains “fully committed” to the purchase and has received positive feedback from investors and customers. For now shareholders seem to be siding with Qualcomm. But Broadcom CEO Hock Tan is a tough negotiator and Qualcomm has big problems.
Tan has been the leading actor in a wave of deals that have shaken up the $300 billion chip industry over the last two years. He’s put together a string of transactions that have more than doubled the size of his company and were applauded by investors who have bid up Broadcom’s stock. Part of what they like is Tan’s ability to cut a deal on his terms.
In his three largest purchases—for LSI Corp., Broadcom Corp. and Brocade Communications Systems Inc.—Tan hasn’t paid more than 6.8 percent over his opening offer, according to regulatory filings. When LSI CEO Abhi Talwalkar asked Tan for an increase of 10 cents a share on his $11.15 offer in 2013 he was told that the bid was final. Talwalkar’s board capitulated to Tan’s price.
A bump of 6.8 percent would take Broadcom’s bid up to $74.76, still below what the company is worth, according to several investors.
“We certainly expect another round,” said David Rolfe, chief investment officer at Wedgewood Partners Inc., which oversees about $5.2 billion.
“It has got to be at least in the $80 handle to get enough shareholders.”
While investors may not like Broadcom’s opening salvo, Qualcomm’s multiple challenges—a legal battle with Apple Inc. and regulatory actions around the world that threaten its lucrative licensing business—have tried their patience and undermined their confidence in the company’s future.
It doesn’t help that Qualcomm has underperformed most other chip stocks this year. Prior to Bloomberg’s report of Broadcom’s offer, Qualcomm’s stock was down 16 percent in 2017, compared with a 41 percent gain by the benchmark Philadelphia Stock Exchange Semiconductor Index. Broadcom, whose offer was partially in its own stock, was up 47 percent. Since the bid, Qualcomm has rallied but is still about 5 percent below the offer price.
“A lot of portfolio managers may be somewhat exhausted holding their Qualcomm position,” said Daniel Morgan, a vice president at Synovus Trust Co., which owns Qualcomm stock. Morgan said an offer of $85 to $95 a share will persuade most to sell.
Mike Green, a long-term Qualcomm backer, is ready to part with his holdings for less. “I’m still an owner although I drastically cut it down three years ago,” said the American Money Management portfolio manager. “I would like to get $75 to $80 for the shares.”
In its response to Broadcom’s offer, Qualcomm’s board cited confidence in the company’s future growth prospects and management’s ability to deliver. Qualcomm has said the ongoing dispute with Apple, which has stopped paying billions of dollars in licensing fees, is a commercial negotiation they will resolve. The record fines levied in Korea and Taiwan, and the US antitrust investigation were prompted illegally by Apple and will be seen off in the courts, they’ve said.
“It might take a lot of litigation, so it’s a tiresome stock that has worn other investors out. We’re getting close to fatigue ourselves,” said Brian Barish, the
chief investment officer of Denver-based Cambiar Investors LLC.