NXP shareholders owe a big 'thank you' to Broadcom's CEO

Broadcom CEO Hock Tan says that buying NXP doesn’t solve Qualcomm’s problems — but he’s currently a hero to NXP shareholders.

The final hurdle may have been proxy advisory firm Institutional Shareholder Services’ report on Friday advocating that Qualcomm close NXP to provide the company “with the next-best safety net of diversification,” failing a deal with Broadcom. Within an hour of the report being published, Qualcomm called some NXP shareholders asking what price it would take to secure a successful tender offer, according to the people, who asked not to be named because the discussions were private.

“Certainty on NXP was important to Qualcomm and its shareholders,” Tom Horton, presiding director of the Qualcomm board of directors, told CNBC today.

ISS determined Qualcomm’s forecast of $ 5.25 in adjusted earnings per share for fiscal year 2019 is “feasible,” given NXP’s expected adjusted net income of $ 2.7 billion, or $ 1.84 per share on a pro forma basis. That’s crucial to Qualcomm’s case that it’s better off as an independent entity than selling to Broadcom for $ 82 a share.

Qualcomm says Broadcom’s offer significantly undervalues the company, assuming it can favorably resolve its ongoing litigation with Apple. Buying NXP allows Qualcomm to argue $ 5.25 in adjusted EPS is a reasonable benchmark.

Horton said past semiconductor deals have been completed with an EPS multiple of 22, which would value Qualcomm, using a projected EPS number of $ 6.75 (with $ 1.50 per share added for the Apple resolution), at a whopping $ 148.50 per share — well above what Broadcom has been willing to offer.

Broadcom has argued $ 4.50 EPS is a more reasonable guidance, even after NXP completion, and resolution with Apple will only generate up to extra $ 1 in EPS accretion, according to ISS.

Qualcomm secured backing from NXP shareholders controlling about 28 percent of the company with its new offer, including activist hedge fund Elliott Management, which has championed a higher bid for months. Qualcomm also lowered the minimum tender threshold to 70 percent from 80 percent to help it close a deal.

Broadcom has said its offer to buy Qualcomm for $ 82 a share — or more than $ 121 billion — is contingent on the NXP deal falling apart or it getting done at the previous price of $ 110 per share.

Tan told CNBC that NXP “would not solve Qualcomm’s problems” in a Feb. 12 interview. Broadcom is “evaluating its options” after Qualcomm’s increased NXP offer, it said in the statement. Qualcomm is still waiting on Ministry of Commerce in China approval as a final regulatory hurdle with its NXP deal.

Qualcomm had internally debated a smaller raise to acquire NXP before it officially increased its bid to $ 127.50, said several people. Qualcomm said in a statement the new price reflects NXP’s recent performance, strong market dynamics, and high confidence in annualized cost synergies of at least $ 500 million “resulting from insights gained” during the companies’ integration discussions and research.

NXP “earnings are up 20 percent from the time we did the deal,” Horton said to CNBC. “And we raised the bid 16 percent. So it’s actually at a lower multiple than the deal when it was originally announced.”

A spokesman for Qualcomm declined to comment further.

Indeed, NXP shareholders who asked Qualcomm for more, including Elliott, have pointed to NXP’s strong performance and the relative stock moves from NXP comparables, including Broadcom, which itself is up 45 percent since the NXP deal announcement on Oct. 27, 2016.

“Qualcomm’s board of directors and management have transferred $ 4.10 per Qualcomm share from Qualcomm stockholders to NXP stockholders, representing approximately $ 6.2 billion of value,” Broadcom said in a statement Tuesday. “This revised price for NXP is well beyond what Qualcomm has repeatedly characterized as a ‘full and fair’ price.”

The higher offer also bucks a recommendation from ISS, which said in its report last week that Qualcomm could negotiate provisions with Broadcom to close the NXP deal at a mutually agreed-upon price. ISS recommended Qualcomm shareholders should nominate four of Broadcom’s six recommended new directors to help facilitate discussions between the two companies on a higher takeout price for Qualcomm. Broadcom has already said its current offer is “best and final.”

Glass Lewis, another proxy advisory firm, today recommended Qualcomm shareholders vote for all six director nominees Broadcom is putting forward, effectively endorsing a Broadcom takeover. Glass Lewis also said an NXP increase “would be to the detriment of Qualcomm shareholders.”

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