Match Game

Your Move, Qualcomm

The activist's valuation may be on the high side, but a bump is in order.
Photographer: Julian Finney/Getty Images
NXP SEMICONDUCTORS NV
-1.98
At Closing, April 23th
103.17 USD
QUALCOMM INC
-0.91
At Closing, April 23th
50.53 USD

Elliott Management Corp. is out with its number for what NXP Semiconductors NV is worth. It's likely higher than what Qualcomm Inc. is willing to pay.

Months after the activist investor took a stake in NXP and started urging behind the scenes for a higher takeout price from Qualcomm, Elliott on Monday released a public slide deck outlining its case. Elliott says Qualcomm swooped in opportunistically while NXP was struggling with a temporary sales drop and that the company shouldn't miss out on a stock surge that's benefited many of its peers since the deal was struck last October. In the meantime, Qualcomm has found itself the subject of both a protracted legal fight with Apple Inc. and an unwanted takeover offer and proxy fight from Broadcom Ltd.

Diverging Fortunes

Since the deal was announced, NXP has easily outperformed Qualcomm, even with the $110 offer capping its appreciation potential and Qualcomm drawing an offer of its own

Source: Bloomberg

In other words, Qualcomm needs this more than NXP does. But Elliott estimates that NXP should be valued at a whopping $135 share as a stand-alone, based on where peers are trading. Tacking on the industry's standard 30 percent premium of late gets you to a takeover price of about $175. That is almost 60 percent higher than the current Qualcomm offer. Such a significant sweetener is virtually unheard of for a deal this size. As it is, Qualcomm would be paying about $37 billion for NXP on an equity value basis. Incorporating the above bump would add $20 billion-plus to the bill.

Elliott is right to push for more money. This deal has always been cheap and the activist investor is just broadcasting critiques other holders have made with a bigger megaphone. Based on both comparable transactions and peers' public market valuations, NXP should be worth more. Qualcomm told Bloomberg News that Elliott's valuation for NXP is "unsupportable", but doesn't really elaborate on why. Doing so would mean taking issue with Elliott's belief  that NXP is poised for above-average revenue growth and significant margin expansion, which then raises the question of why Qualcomm thinks NXP is so great to begin with.

Not Even Close

Qualcomm and Elliott are far apart as to what NXP should be valued at. There may be some middle ground at which other shareholders would be comfortable selling.

Source: Elliott presentation, Bloomberg

Perhaps a lower premium to Elliott's stand-alone value would be sufficient, given this deal is so close to the finish line after a protracted regulatory approval process. That's still better than a discount, after all. But even a more modest 10 percent bump from Elliott's NXP valuation still gets you to a more than $10 billion boost.

Clearly, with these kinds of numbers, the deal starts to make less sense financially for Qualcomm. Pro-forma net leverage would increase well past what's reasonable, according to data compiled by Bloomberg. Even taking into account the $500 million of synergies Qualcomm is targeting, the accretion math becomes more tenuous. 

Falling Short

Qualcomm's offer values NXP at a discount to its self-identified peers

Source: Elliott presentation; Bloomberg

Analysts were thinking something more in the $120-$125 range could be doable for Qualcomm -- that's a mere 10 percent to 15 percent increase from the original proposal. A bump in that range might still do the trick. Elliott is a large holder, but its 6 percent economic interest won't be enough to swing the deal on its own. Qualcomm needs 80 percent of NXP holders to tender their shares. Several merger arbitrage firms have crowded into the stock over the past few months and they may be more willing to take something below what Elliott is angling for.

But Qualcomm needs to start taking these frustrations seriously. It's kicked the can down the road for months on raising the NXP offer and has only made things harder for itself. 

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

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

    To contact the editor responsible for this story:
    Beth Williams at bewilliams@bloomberg.net

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