by Travis Johnson, Stock Gumshoe | October 28, 2016 4:24 pm
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Hi Travis – Great job, as usual ! But — RE: Qualcomm and NXPI – Is it really a good deal for NXPI investors to hold and wait a year? NXPI has one and a half times more employees than Qualcomm and although its test and assembly sites are in Asia, three of its seven wafer factories are in the Netherlands, Germany and Britain (still in the EU) with labor laws that may make it hard to reduce costs by laying off workers cheaply and some factories are too old to be adapted to make Qualcomm chips! NXPI also brings in a lot of its own debt into the deal, in the billions. Is it worth waiting for a year for NXPI shareholders to see if it works out rather than take our profit now? If you own NXPI and sell now, it is a profit of almost 20% if you bought in September (even more of a profit if you bought NXPI earlier this year – it was below $70 in February!) . Why be greedy and hope for another 10% in a year – NXPI has operations in about 35 countries; what if one of the major ones blocks this for anti-competitive reasons?
That depends on what you think the risks are, and on whether you are willing to accept a 10% return for one year. That’s why I’m holding at the moment, because I don’t have something better that I’m dying to buy…. and while I think NXPI has more potential to go above $110 on its own, I don’t have a lot of confidence in the broad market rising 10% over the next year.
I would be surprised to hear of this deal being blocked, since it’s not likely that Qualcomm would be laying off a lot of workers or closing lots of plants, and there’s almost no overlap in business that would create anticompetitive concerns. Qualcomm is largely a fabless semiconductor company and NXPI owns a lot of plants, so that’s a challenge to merge those two strategies, but that doesn’t mean they’d immediately try to turn NXPI into a fabless company as well. I think the synergies would more likely be in design and cross-selling than in manufacturing, but it probably won’t be all that synergistic a deal with a lot of cost cuts — it would largely be just QCOM getting some cheap earnings leverage using cheap debt and their stranded overseas cash.
I wouldn’t object to someone selling NXPI here, it’s not like there’s a good chance of a big upside. I’m holding because of the lack of a better idea at the moment and on the off chance that there’s some pressure over the next few weeks for a better deal… but at current prices I would rather be a QCOM owner than a NXPI owner if the deal looks like it will sail through.
To hold a year for a guaranteed 10% wouldn’t thrill me or anyone in arbitrage. I think $NXPI can beat that offer on it’s own so Qualcomm may have to up the ante a bit.
Sharing @TipRanks article on Here’s What Top Hedge Fund Managers Recommended at Sohn Investment Conference http://blog.tipranks.com/2016/10/simple-steps-testing-even-best-investment-ideas/?
$COTY, $PCLN $CTRP and others… no positions; TipRanks member
Best2All ~ Ben
Hi Travis – if this deal will be as accretive to QCOM as you say, why wait on the merger? I would think QCOM will rise more than 10% more if the deal is approved so wouldn’t it make sense to sell now and buy QCOM stock?
Yes, probably. That assumes the price stays the same and the deal goes through, but QCOM is the wiser choice at this point — I’m just not rushing into it.
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