(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of NXPI and SWKS.)
Qualcomm Inc.'s (QCOM) pending acquisition of NXP Semiconductor N.V. (NXPI) took another turn on December 11, when Elliott Management, an activist investor, laid out a base case scenario valuing NXP shares at $135, nearly 23 percent higher than Qualcomm's bid price of $110.
The Elliott Management valuation is in agreement with an Investopedia article from June 22, 2017, that calculated a fair value of roughly $133 per share. Further multiple expansion in the sector since the valuation in June could now support a price of approximately $145 a share. (See also: Why Qualcomm May Have to Pay $45 Billion for NXP.)
Qualcomm noted that Elliot's valuation report was an attempt just to push its own agenda and that NXP is fairly valued at $110. Meanwhile, the market seems to disagrees with Qualcomm on NXP's fair value, as do NXP shareholders.
The Case For $145
Since September 30, 2016, the iShares PHLX Semiconductor ETF (SOXX) has increased by nearly 27 percent, while companies like Skyworks Solutions Inc. (SWKS) and Broadcom Ltd. (AVGO) have increased by almost 50 percent. Broadcom is currently in the process of trying to acquire Qualcomm.
The sharp rise in price over the past year had led to multiple expansion, which has pushed Skywork's one-year forward earnings multiple up by nearly 14 percent, and Broadcom's up by almost 15 percent. NXP's multiple has increased by only 2.25 percent due to the $110 bid capping the stock's rise.
Should NXP's multiple expand like its peers at roughly 14 percent, its one-year forward multiple would be nearly 18.25. With 2019 earnings estimates of $7.93, this would give the stock a value of nearly $145.
For some time, the options market has been projecting that a deal for NXP would come at a price greater than $110. The option price has even suggested that the amount could be higher than $120.
As of December 12, the calls set to expire on January 18, 2019, have sizeable open interest, with roughly 30,600 contracts at the $115 strike price while trading at a price of $9.50, a notional value of about $30 million. The strike price plus the cost of the options imply a breakeven price of nearly $125, which means traders are betting the stock will rise above $125. (See also: Qualcomm May Have to Pay $120 to Clinch NXP Deal.)
Shareholders Tight Grip
NXP shareholders have been unwilling to tender their shares to Qualcomm, with the last tender offer closing on November 17. At the time, only 2.4 percent of NXP shares had been tendered at the $110 deal price.
The next tender period will close on December 15, and it seems unlikely the amount tendered would increase, given NXP's current stock price of about $116.
Despite Qualcomm's best efforts to close the deal without having to raise the bid price on NXP above $110, it seems unlikely to happen. Shareholders have been unwilling to tender their shares, while the market continues and NXP peers continue to trade at valuations that suggest NXP is worth significantly more than Qualcomm's current offer.
Barring a meltdown in the market or valuations in the sector, it seems unreasonable to think investors would tender their shares at a price less than it current market value.
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.