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Broadcom Ltd. AVGO has been dominating headlines with its proposed merger with Qualcomm QCOM. The status of that deal has finally come to a conclusion, with President Trump’s order to immediately prohibit the proposed takeover on grounds of national security concerns.
Trump’s move came after an engrossing week which reflected Broadcom’s roaring plans to move to the United States, Qualcomm’s executive chairman stepping down from being enthusiastically involved in the company and chip giant Intel Corp. INTC getting involved in the argument.
The rejection stems from Trump’s concern of conceding China the upper hand in mobile cell phone communications. As Qualcomm emerged as one of the biggest competitors to China's Huawei Technologies Co, the Broadcom-Qualcomm deal would be a clear signal of losing technology-knowhow for this sector to China. This in turn makes Qualcomm a valued company.
In the beginning, Broadcom had offered $70 per share for a total value of $130 billion that was subsequently rejected by Qualcomm. After the rejection, Broadcom presented the ‘best and final offer’ of $82 per share, which was rejected again.
Broadcom made yet another acquisition offer recently for Qualcomm. The bid now stands at $117 million, or $79 per share, down from $82 per share previously.
Broadcom intended to go ahead with the deal in order to reap the benefits of cost reduction. Qualcomm’s investment in 5G wireless services as well as NXP purchase, which will offer significant exposure to self-driving cars and automotive market, will provide significant advantage to Broadcom. Moreover, Broadcom is eyeing this cash cow for its patent licenses, which amounted to more than $5 billion at the end of 2017.
The U.S. Treasury's Committee on Foreign Investment in the United States (“CFIUS”) has outlined key concerns in a letter dated Mar 5, 2018 to both Broadcom and Qualcomm related to their proposed merger deal.
The decision of the regulatory body is unprecedented in view of the fact that Broadcom’s proposed $117 billion (net of debt) bid for a hostile takeover of Qualcomm has not been finalized so far. The decision of the secretive government panel reflects an aggressive position by the administration to protect major American corporate names from being acquired by non-U.S. entities.
Several Concerns Regarding the Deal
Qualcomm is U.S. mobile chipset giant and a global leader for setting wireless standards, Broadcom is based in Singapore, notwithstanding the fact that the company expressed its desire in last November to shift its legal headquarter to the United States.
Qualcomm generally spends more than 20% of its revenues on R&D every year. Massive investment in R&D is an integral part of Qualcomm to maintain its global leadership position in the smartphone chipset market. Compromising Qualcomm's assets through arrangements with "third party foreign entities," will significantly affect national security of the United States.
It appears that members of the Congress and the Federal Communications Commission (“FCC”) are concerned that the emergence of Huawei as a major supplier of communications equipment and Broadcom’s chances of selling parts of Qualcomm to Huawei or another Chinese firm to bring down costs could see important communications technology get transferred to the Chinese.
Redomicile Plan to Help Qualcomm Bid
Broadcom had announced its intent to redomicile in the United States. The company is currently incorporated in Singapore with headquarters there as well as in San Jose, CA.
The redomiciling will help Broadcom to aggressively pursue the Qualcomm bid that was recently rejected. Qualcomm believes that the current offer undervalues the company. It is also uncertain about getting regulatory support for the proposed deal.
We note that being an overseas-based company, Broadcom is subjected to scrutiny by the CFIUS.
The redomiciling will at least make the regulatory environment smooth for Broadcom, which remains committed to pursue the hostile Qualcomm bid.
Broadcom Limited Price
Broadcom Limited Price | Broadcom Limited Quote
Although the buyout will make Broadcom the largest entity in the tech segment, it is likely to face anti-trust regulation issues for the same.
If the deal is cancelled on account of regulatory opposition, Broadcom will pay $8 billion for the disruption caused. Broadcom expects to obtain necessary approvals to close the deal within a year. If it takes longer, it will pay 6% a year of the amount to be paid in cash as compensation.
Zacks Rank and Other Stocks to Consider
Broadcom carries a Zacks Rank #2 (Buy).
Another top-ranked stock in the semiconductor industry is NVIDIA NVDA, sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
NVIDIA has a long-term expected earnings growth rate of 10.25%.
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