President Donald Trump’s decision on Monday to scuttle Broadcom’s acquisition of Qualcomm has put both companies nearly back where they started last fall. But the shocking conclusion impacts their businesses differently.
For Qualcomm, which was bogged down in lawsuits and antitrust investigations last year, the challenges remain significant, including a potentially damaged relationship with its shareholders, Wall Street analysts said. Broadcom, which was in a stronger financial position before its controversial merger effort, is seen as emerging relatively unscathed as it refocuses on other targets, according to the analysts.
Since the proposed $117 billion deal blew up on Monday because of national security concerns, Broadcom’s shares have dropped 1% while Qualcomm shares have tumbled 7%. Still, looking back to the end of October, to just before news of Broadcom’s unsolicited pursuit, Qualcomm (QCOM) remains up 15% while Broadcom (AVGO) is down 1%.
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But Qualcomm, the longtime dominant force in chips for mobile phones, may have to act quickly to prevent a deeper stock price decline.
In trying to fend off Broadcom, Qualcomm made changes to please shareholders, including announcing a $1 billion cost-cutting initiative and demoting former CEO Paul Jacobs from the role of executive chairman. Still, Qualcomm remains in a legal war with its former best customer, Apple, and smartphone sales growth is nearly flat.
A prior, separate deal by Qualcomm to acquire NXP Semiconductors (NXPI) seems closer to completion after Qualcomm raised its offer for the automotive chip specialist. But fears are mounting that China may block the deal in retaliation for Trump blocking Broadcom’s now abandoned acquisition—which was linked to hemming out Huawei—or because of Trump’s recent trade tariffs.
Qualcomm CEO Steve Mollenkopf also faces pressure over his company’s current share price hovering around $58 versus the $79 to $82 offered by Broadcom. Shareholders were ready to vote in favor of six candidates for Qualcomm’s board proposed by Broadcom, Bloomberg reported last week. Mollenkopf and Jacobs were in danger of losing their board seats, the story noted.
“The genie is out of the bottle with respect to investor dissatisfaction with QCOM stock’s underperformance,” Raymond James analyst Chris Caso wrote in a report after the deal collapsed. “We don’t expect investors to sit still and accept the prior status quo. That said, the Presidential order has likely removed any chance of Qualcomm becoming an acquisition target in the foreseeable future.”
“We think the blocked deal will likely frustrate QCOM investors, as many were looking for a change in control,” adds Angelo Zino, an analyst at CFRA Research. Qualcomm investors are “the obvious big loser from the blocked deal.”
“For Qualcomm, they now must sink or swim, focusing on closing (NXP Semiconductors) as well attempting to rebuild credibility with their shareholders,” Stacy Rasgon, an analyst at Bernstein Research, wrote. “We do note recent news flow of some steps in that direction.”
Broadcom CEO Hock Tan built his company into a communications semiconductor powerhouse via a series of savvy acquisitions, a game plan that he will likely to continue to follow, analysts said.
“Broadcom can continue to find reasonable M&A targets,” Bernstein’s Rasgon noted. “We also wonder if cash return could be accelerated further,” such as with a higher dividend or more share buybacks.
The most likely takeover targets left in the industry now that Qualcomm is considered off the table include Cypress Semiconductor (CY), Integrated Device Technology (IDTI), Maxim Integrated Products (MXIM), Mellanox Technologies (MLNX), ON Semiconductor (ONNN), and Semtech (SMTC), CFRA’s Zino wrote.
“Despite the rejected combination, we expect (Broadcom) to remain a key beneficiary of industry consolidation and we think it now should focus on increasing its exposure within the automotive and industrial end-markets,” Zino said.