(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of NXPI.)
Qualcomm Inc. (QCOM) will need to start thinking about the price it is going to have to pay for NXP Semiconductors NV (NXPI) a little more. That's because investors continue to refuse to tender their NXP shares. Why would investors want to tender their shares of the chipmaker when the stock is trading around $115.75, and Qualcomm's bid price is just $110? The latest tender offer was basically unchanged, with only 3.6 percent of total shares outstanding tendered. That number is up slightly from 3.2 percent from last month's tender.
An article in the Wall Street Journal noted that the NXP deal is expected to close by the end of 2017. It is going to be hard to close the deal if shareholders aren't willing to tender their shares. The market is saying pretty loud and clear that $110 is not enough.
Options Imply Higher Price
The January 18, 2019 options have 31,000 contracts of open interest for the $115 calls. The options trade at $9 per contract, which means NXP would need to trade above $124 to be profitable. The diagram below shows the open interest in NXP. As we can see, most of the open interest rest in the $110, $115, and $120 strike prices, for January 2018 and January 2019.
North of $125
The January 2018 calls with the strike price of $115 trade for $4, which implies a breakeven price of about $119. The two different set of options series suggest the market is looking for an increased bid from Qualcomm, somewhere north of $125. The logic seems relatively straightforward. Why put up $4, only to make $1? Or why put up $9 to make $1? Remember that if an option expires below the strike price on a call, a trader loses the entire premium paid.
Qualcomm will likely need to step up its bid to get the deal closed at all, let alone in 2017. Qualcomm has continued to show its commitment to acquiring NXP with the recent announcement of offering the EU concession, back on October 5.
Qualcomm has the right idea in wanting to acquire NXP, due to NXP's position as a supplier of chips to the automotive industry. That is a sector that likely has a very long growth path ahead. But the market, for now, is telling Qualcomm the $110 bid price is just not enough.
The tender offer has been extended again until November 17.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.