If you believe the news, a Broadcom / QCOM merger makes for some interesting and complicated questions.
- An unsolicited $100 billion plus-offer to buy Qualcomm Inc. — a company that’s trying to close a $47 billion deal to buy NXP Semiconductors NV (NXPI) — is pretty stunning.
- I see a lot of cost and product synergies and cost saving for Broadcom
- Add in the QCOM and NXPI valuations, and the proposed $70/share could be a bargain in the long run.
- But, Broadcom may not even want to pursue or finance the NXPI deal.
- And there are potential settlements with Apple on QCOM’s side which would affect the price. Since Broadcom is already such a big Apple supplier, a merger might work in AVGO and QCOM’s favor.
- One can count on a lot of push back from the anti-trust encampments. There will most likely have to be some concessions in the form of asset sales to make this deal work.
- AVGO recently announced it would re-domicile from Singapore to the U.S. regardless of the fate of proposed corporate tax reforms.
- My guess is, regardless of the outcome, their rates will go up.
- I think this deal aids in the good PR factor for any questions regarding approving the merger.
This potential merger also creates some very interesting option strategies.
When the news was announced Friday afternoon during trading hours, both stocks witnessed volatile price movements. Interestingly, both ultimately went up on the news. Sometimes, the price of the company making the offer goes down. But in this case, most investors seem to think this merger could be beneficial to both Broadcom and QCOM.
However, with a potential buyout price of $70 per share, QCOM’s price action stopping at $61 makes for some opportunity in my opinion.
If you believe the news and believe this will happen then it is safe to say that a minimum price of $70 for QCOM is very attainable.
If you don’t believe the news, or think this is an impossible deal, then the price movement on QCOM from $55 to $61 is not sustainable.
Based on the price movement alone, I think the rest of the investment world is more than slightly skeptical. This would warrant looking for the price of QCOM decreasing.
- One could sell out of the money calls and purchase out of the money puts.
Conversely, believing this is a done deal, one could anticipate QCOM’s price increasing to $70 per share.
- One could sell out of the money puts and buy out of the money calls.
- One could also buy 100 shares or more of QCOM, (remember you believe the price is going up) and sell covered calls and puts to reduce your cost and collect the premiums.
Taking a look at various option dates and prices, I am particularly interested in the short term play with the December monthly pricing.
Personally, I think buying a December 15 $70 Call and a $55 Put is worth the gamble.
But other time frames, such as April ’18 and January ’19, would make worthy candidates for options trading. At this point in time, I am really on the fence believing the validity of the buyout/merger actually happening.
I think if the rumors aren’t killed soon or if the news is confirmed, then hype and bidding wars will help drive this up in the near term but, with all the regulatory and legal hurdles involved, the deal will ultimately fail.
So what are your thoughts on this? How would you play this scenario?