(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of NXPI.)
Options traders are betting that the pending acquisitions between Qualcomm Inc. (QCOM) and NXP Semiconductor NV (NXPI) will fail, according to the open interest in the options set to expire on July 20. The deal is currently awaiting approval from Chinese regulatory agencies, but the deal now appears to be in jeopardy.
Qualcomm withdrew and refiled with regulators on April 19, to continue examining its pending deal with NXP, in hopes for approval. A press release also noted that should permission not be granted by July 25, Qualcomm would need to pay NXP its agreed-upon termination fee. Options traders appear to be betting heavily that the approval does not happen, which would be a significant blow to both companies.
The options set to expire July 20 show a tremendous amount of open interest on the put side, with nearly 50,000 open contracts at the $110 strike price, almost 33,000 open contracts at the $105 strike price and 23,000 open contracts at the $100 strike price. With the value of the options trading in a range of $4.5 to $10 per contract, it represents a dollar value of more than $76 million, a considerable amount of money. The volume of open interest has exploded higher since April 11 on the $110 puts rising from roughly 4,000.
Big Blow to Qualcomm
For Qualcomm, the loss of NXP could be devastating on two fronts. First, it must pay NXP a termination fee of $2 billion. The deal will also be a big blow to Qualcomm's ability to further diversify and strengthen its product offerings and drive future revenue higher. Qualcomm has seen revenues slump since peaking in 2015, and the acquisition of NXP was a way for Qualcomm to reignite growth. For Qualcomm shareholders, a failed NXP deal could be the second big disappointment of 2018: Broadcom Inc.'s (AVGO) proposed acquisition of Qualcomm was blocked by the Trump administration, causing Qualcomm's shares to plunge over 26% from their 2018 highs.
NXP Hurt in Short-Term
NXP shares have also suffered. Its stock has fallen by nearly 16.6% off its 2018 highs, presently trading around $104.5 a share, well below Qualcomm's acquisition price of $127.50. While NXP may continue to suffer over the short term from the fallout of the deal, the company should thrive in coming years, considering its influential position in the automotive chip sector and near-field communication.
There are plenty of question marks that remain in the continuing Qualcomm-NXP saga, but options traders are betting the merger between these two companies never gets completed.
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.