The Ratings Game: Broadcom-Qualcomm deal could smooth Apple beef, but bid may fail, analysts say

Broadcom Ltd.’s unsolicited bid of more than $100 billion for rival Qualcomm Inc. is unlikely to go through at the offered price, but a completed deal could smooth out Qualcomm’s fractured relationship with Apple Inc., analysts said Monday.

Qualcomm QCOM, +1.63% has been having trouble with Apple AAPL, +0.22%, affecting the chip maker’s valuation, since the iPhone maker stopped paying Qualcomm licensing fees in April. Analysts pointed out Monday morning, when the unsolicited bid of $70 a share was made official following reports of the effort Friday, that Broadcom AVGO, -2.84% has a solid relationship with Apple and could find a solution.

“We believe this deal would make sense, as we see significant cost synergies and the opportunity for Broadcom to leverage its healthy relationship with Apple to mend the current strife between Qualcomm and Apple”, wrote KeyBanc analyst John Vinh, who rates Broadcom a buy with a $290 price target.

Investors have responded positively to the news, and since Friday have sent Qualcomm shares up 14% to $62.52, still lower than Broadcom’s bid of $70 a share. Broadcom shares are up nearly 6.94% to $277.52 since Friday.

Analysts are doubtful that the deal goes through, though, especially at the price Broadcom is offering. Canaccord Genuity analyst Michael Walkley wrote in a note to clients that Qualcomm’s executives would prefer to remain an independent company than accept the offer, which values Qualcomm at roughly $130 billion.

He also wrote that the combined company would become a “dominant wireless business and overall global semiconductor leader.” Walkley rates both Qualcomm and Broadcom a buy, with price targets of $76 and $300, respectively.

RBC Capital Markets analyst Amit Daryanani wrote in a note to clients Monday that Broadcom is a disciplined buyer, but a deal will not close soon. “We think in an unsolicited offer – rarely is the first offer the last one, suggesting there is an upside bias to Broadcom’s math.”

Daryanani rates Broadcom stock a buy with a price target of $300. In Monday’s note, Daryanani wrote:

Assuming QCOM’s QTL business could reach a settlement with AAPL sooner under AVGO’s ownership (40-60% of prior economics), the accretion potential from the QCOM acquisition could be 5-10% higher.

But not every analyst sees the $70-a-share valuation as too lofty. Stifel analyst Kevin Cassidy wrote in a note to clients that his models suggest a $65 price target. In a note to clients Sunday, he wrote that a deal isn’t going to close soon:

“More importantly, the ~$100bn financing need by Broadcom and regulatory approvals could delay this acquisition by 12 months or more, in our view. Our rough estimates for cost synergies through the combined company would be ~$1.5bn/year or ~12% increase over the companies’ combined 2018 non-GAAP income.”

SunTrust Robinson Humphrey analyst William Stein also noted the regulatory challenges in a note to clients Friday and wrote that if the deal goes through, the combined entity would be the third-largest chip company behind Intel Corp.

INTC, -0.06% and Samsung Electronics Co. 005930, -0.50%. He has a buy rating and $281 price target on Broadcom.

Of the 31 analysts that cover Broadcom, 29 have a buy or overweight rating on the stock and two have a hold rating, according to FactSet. The average target price for the stock is $289.32. Broadcom stock is up 56.99% this year, with the S&P 500 index SPX, -0.14% rising 15.6%. Qualcomm stock has dropped 4.1% this year amid the fight with Apple. Of the 25 analysts that cover the chip maker, 11 rate the stock a buy or overweight, with the remaining 14 rating it a hold. The average price target is $63.22.

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