Deals

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.

Broadcom Ltd. and Qualcomm Inc. should take note of this small(er) semiconductor deal.

Marvell Technology Group Ltd. on Monday said it's acquiring Cavium Inc., a maker of networking processors, for about $6.3 billion including debt. It's a far cry from the more than $85 billion bid Broadcom made earlier this month for Qualcomm, but even at this smaller scale, the valuation math is telling. Marvell's bid appraises Cavium at 14 times its estimated fiscal 2018 Ebitda. Broadcom's offer, which Qualcomm rejected as too low, works out to a multiple of about 12.5 times on the same basis. This calculation excludes Qualcomm's pending acquisition of NXP Semiconductors NV (more on that later) and assumes a more normalized balance sheet.

Bargain Shopping
Qualcomm shares have been rocked by one fight after another, and shareholders are understandably over it. But $70 a share is a steal, considering Qualcomm traded for that a year ago.
Source: Bloomberg

Qualcomm is cheap for a reason. As my Gadfly colleague Shira Ovide recently noted, few companies have faced as many challenges, from an activist investor clamoring for a breakup to antitrust critiques across the globe and a testy legal fight with Apple Inc. But Cavium hasn't been perfect, either. Its $1 billion acquisition of QLogic Corp. last year was panned by analysts and investors who saw little strategic rationale in such a slow-growing asset. Shows what they know: the purchase helped diversify Cavium's customer base and the stock had climbed about 58 percent since the deal was announced.

Broadcom is reportedly prepared to take its pursuit for Qualcomm hostile, and there's logic in appealing directly to shareholders with an exit from the company's constant state of embattlement. But it's going to have to raise its offer to get investors' sign-off. They may be tired, but they're not tired enough to take Broadcom's measly $70 a share proposal.

Struggling
Analysts have lowered their forecasts for Qualcomm's 2018 Ebitda amid its legal battle with Apple
Source: Bloomberg

The median Ebitda multiple paid in semiconductor takeovers of more than $100 million since the beginning of 2011 is close to 15. Splitting the difference between that and what Cavium is commanding gets you to a price of $79 a share for Qualcomm on its own. Wouldn't you know it, that's right around the minimum bid of $80 that Qualcomm shareholders surveyed by Bloomberg News said they would be willing to accept.   

While we're on the topic of price, it's worth remembering that Qualcomm's pursuit of NXP is still very much unfinished. As of November 16, just 2.4 percent of NXP holders had tendered their shares in exchange for a $110 offer that Elliott Management Corp. and others have deemed too low. Broadcom has said its proposal for Qualcomm stands whether the NXP deal is consummated at the current agreed-upon price or if the transaction is terminated -- a clause that noticeably leaves out the option of renegotiating that deal.

Stacked Chips
Should Broadcom succeed in buying Qualcomm, dealmaking in the semiconductor industry would exceed last year's record
Source: Bloomberg

Elliott has been publicly mum about where it stands on Broadcom's arrival on the scene, but the company's bid for Qualcomm would seem to support the activist investor's argument that NXP is undervalued. Accounting for NXP's updated balance sheet, Qualcomm's $110 a share offer values the company at only about 11.5 times its projected 2018 Ebitda. And you thought Broadcom was trying to get Qualcomm on the cheap.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Broadcom has said its proposal values Qualcomm at $130 billion inclusive of $25 billion in net debt and its acquisition of NXP. That's also about 12.5 times the two companies' combined projected Ebitda for fiscal 2018. 

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Daniel Moss at dmoss@bloomberg.net