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Here's Why Broadcom Acquiring Qualcomm Would Be A 'Financial Engineering Masterpiece'

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Here's Why Broadcom Acquiring Qualcomm Would Be A 'Financial Engineering Masterpiece'
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Broadcom Ltd (NASDAQ: AVGO)'s proposed acquisition of QUALCOMM, Inc. (NASDAQ: QCOM) is nothing short of an "impressive financial engineering masterpiece," KeyBanc Capital Markets' John Vinh said in a Sunday note. 

Broadcom is offering Qualcomm's investors $70 a share in cash and stock as part of a merger agreement in a deal that would "make sense" for all parties, Vinh said. (See Vinh's track record here.)

A combined entity would generate significant cost synergies for Broadcom — and perhaps more importantly, it boasts a "healthy" relationship with Apple Inc. (NASDAQ: AAPL), Vinh said. Qualcomm's relationship with Apple continues to deteriorate, with reports suggesting Apple is considering an end to their business relationship.

Broadcom would be in a better position to "mend the current strife" between Qualcomm and Apple, Vinh said. Qualcomm's baseband is "clearly superior" and under its umbrella, Broadcom would likely be able to increase its relationship with Apple, the analyst said. After all, Apple likely wants to source the majority of its baseband business from Qualcomm if there were no ongoing legal disputes between the two.

As part of any merger agreement, Broadcom would likely divest or put an end to any R&D plans relating to emerging technology projects such as ARM servers, Vinh said. Doing so would contribute to an expected 35 percent reduction in operating expenditures associated with an acquisition.   

Broadcom's acquisition of Qualcomm could drive its consolidated earnings per share as high as $22.97 which would imply a fair value of $350 per share, the analyst said.

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DateFirmActionFromTo
Nov 2018JP MorganReinstatesOverweight
Nov 2018Deutsche BankReinstatesBuy
Sep 2018NomuraUpgradesNeutralBuy

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