IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

Arun has over 15 years’ experience covering the Technology sector. During this time, he has worked with technology start-ups and as an equity analyst in investment banks and independent research firms. He was formerly a Technology Analyst for Canaccord Genuity, Altium Securities, Espirito Santo Investment Bank, Noble Group and Clear Capital. He has a dual Master’s degree in Financial Engineering and Industrial and Operations Engineering from the University of Michigan. He obtained his Bachelor’s degree in Mechanical Engineering from the Indian Institute of Technology, Bombay. He is also a CFA charterholder.

IPOs and Catalysts/Events

Qualcomm: Pinned into an Uncomfortably Tight Corner, Elliott Values NXP at $135 Per Share

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Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

Event-Driven

<p>Just when you thought that <a href="https://www.smartkarma.com/entities/998" target="_blank" data-smartkarma-citation="entities:998:1">Broadcom Limited (AVGO US)</a>’s drama-filled pursuit of <a href="https://www.smartkarma.com/entities/969" target="_blank" data-smartkarma-citation="entities:969:1">Qualcomm Inc (QCOM US)</a> had enough twists and turns, a new story-line has started to take shape. Broadcom shares surged around 7% in after-hours trading on Friday after the <a href="https://www.wsj.com/articles/intel-considers-possible-bid-for-broadcom-1520633986" target="_blank">Wall Street Journal reported</a> that <a href="https://www.smartkarma.com/entities/16764" target="_blank" data-smartkarma-citation="entities:16764:1">Intel Corp (INTC US)</a> was weighing up a possible bid for Broadcom. Our view is that an Intel bid for Broadcom is unlikely to succeed due to the following four factors:</p><ol class=""><li>Broadcom shareholders have little reason to stop backing a winning management team. Over a five-year period, Broadcom’s shares have delivered a 650%+ return which ranks it in the seventh position among the S&amp;P 500 constituents.</li><li>We believe Intel’s offer needs to be at least a 30% premium to the pre-rumour share price to gain any credibility with Broadcom shareholders. Based on a pre-rumour share price of $247, Intel would need a bid of at least $321 per share, implying an EV of $145 billion and an FY18 EV/Sales multiple of 7x. Paying a hefty premium to Intel’s FY18 EV/Revenue multiple of 4x will be a tough sell to Intel’s shareholders, particularly as it will be Intel’s single largest M&amp;A transaction.</li><li>Given Broadcom’s lean operating cost base, the Intel/Broadcom combination likely has limited cost synergies. Broadcom, under Hock Tan, has a solid track record of generating shareholder value through financial engineering and cost-cutting. Broadcom has a long-term operating margin target of 47.5% vs 30% for Intel.</li><li>An Intel/Broadcom transaction will involve a long regulatory process and require clearance from a dozen regulators including in the US, EU, China, Korea, Japan along with national security agencies. Regulatory clearance would likely require meaningful divestitures of overlapping product lines. Finding buyers for these assets which satisfy global anti-trust and national security concerns, while possible, will take time.</li></ol>

Just when you thought that Broadcom Limited (AVGO US)’s drama-filled pursuit of Qualcomm Inc (QCOM US) had enough twists and turns, a new story-line has started to take shape. Broadcom shares surged around 7% in after-hours trading on Friday after the Wall Street Journal reported that Intel Corp (INTC US) was weighing up a possible bid for Broadcom. Our view is that an Intel bid for Broadcom is unlikely to succeed due to the following four factors:Broadcom shareholders have little reason to stop backing a winning management team. Over a five-year period, Broadcom’s shares have delivered a 650%+ return which ranks it in the seventh position among the S&amp;P 500 constituents.We believe Intel’s offer needs to be at least a 30% premium to the pre-rumour share price to gain any credibility with Broadcom shareholders. Based on a pre-rumour share price of $247, Intel would need a bid of at least $321 per share, implying an EV of $145 billion and an FY18 EV/Sales multiple of 7x. Paying a hefty premium to Intel’s FY18 EV/Revenue multiple of 4x will be a tough sell to Intel’s shareholders, particularly as it will be Intel’s single largest M&amp;A transaction.Given Broadcom’s lean operating cost base, the Intel/Broadcom combination likely has limited cost synergies. Broadcom, under Hock Tan, has a solid track record of generating shareholder value through financial engineering and cost-cutting. Broadcom has a long-term operating margin target of 47.5% vs 30% for Intel.An Intel/Broadcom transaction will involve a long regulatory process and require clearance from a dozen regulators including in the US, EU, China, Korea, Japan along with national security agencies. Regulatory clearance would likely require meaningful divestitures of overlapping product lines. Finding buyers for these assets which satisfy global anti-trust and national security concerns, while possible, will take time.

Intel: Broadcom Rumoured Bid Is More Bark than Bite