The tech world is abuzz this week about a proposed deal between Broadcom (AVGO) and Qualcomm (QCOM), two of the largest semiconductor companies in the world. A Broadcom-Qualcomm merger would be the largest-ever tech takeover, as Broadcom is offering to pay $130 billion for its rival. Not surprisingly, both chip stocks are up sharply on news of the potential deal, which trickled out last Friday.
But that doesn’t mean you should dive in. Broadcom has cried wolf before.
Qualcomm the Next Brocade?
Last November, Broadcom and Brocade Communications Systems (BRCD) had agreed in principle on a $5.5 billion deal. A year later, the Broadcom-Brocade merger still hasn’t been completed, held up by extensive regulatory review, including an accusation by the Federal Trade Commission (FTC) that the deal is anticompetitive. The two sides still expect the deal to be approved by the end of November. But it’s not a slam dunk, even a year after the deal was announced.
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Like QCOM today, BRCD stock got a nice short-term bump last November when it looked like a Broadcom takeover was imminent. A year later, BRCD is essentially flat, up a mere 1.3%, compared to a 31% run-up in the Nasdaq. Tech stock investors aren’t always known for their patience, and after an initial jump from 8 to 12 last November, Brocade shares have barely budged since (see one-year chart below).
Like BRCD a year ago, QCOM stock has been a bit up-and-down of late, down a tick in 2017 despite a blast-off from 51 to 64 in the last week as rumblings of the Broadcom-Qualcomm merger started to bubble to the surface. As part of its takeover proposal, Broadcom has offered to buy QCOM stock for the equivalent of $70 per share ($60 per QCOM share, $10 per AVGO share), a 28% premium to its $54.85 closing price last Thursday, before initial reports of the deal become public. At $64 as of this writing, QCOM has already closed more than half that 28% gap!
Broadcom-Qualcomm Merger Already Baked into QCOM
Unless the Broadcom-Qualcomm merger is fast-tracked—unlikely given the size and scope of the deal—QCOM stock is likely to hit a wall like BRCD did a year ago. Even if it does reach Broadcom’s $70 buyout price, that’s a mere 8.5% premium to QCOM’s current share price.
While QCOM and BRCD are examples of why it can pay to own takeover targets before a deal to acquire them materializes, buying either stock after a proposed deal is announced isn’t always a great idea. In the tech world, mega deals often take a while to be completed, and sometimes don’t get approved at all. If QCOM slumps back a bit, it might be worth the investment a few months from now. Similarly, BRCM looks like a better value today, now that the Broadcom buyout seems closer to finally getting approved, than it did when the deal was announced last November.
AVGO, meanwhile, looks like a much better growth stock in the short or the long term. The stock is up more than 60% in the last year, and just broke out of a five-month base on news of its Qualcomm buyout. If the Brocade deal gets approved this month, that could extend AVGO’s Qualcomm-related rally well into the new year.
*Note: A previous version of this article mistakenly said that Broadcom is offering Qualcomm shareholders $60 per share. The company is actually offering $60 per share of QCOM and $10 per share of its own stock, AVGO. We apologize for the error.
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