Investors are just waiting on one last regulatory approval. The negligible interest in Qualcomm's tender offer is about to make a U-turn.
Tuesday morning, Qualcomm revised its tender offer for all of NXP's shares. The purchase price moved from $110 to $127.50 per share, and the minimum acceptance level to trigger a takeover was lowered from 80% to 70%.
The company also secured the backing of nine large shareholders, whose holdings add up to 28% of NXP's total share count. This group includes activist investor firm Elliott Advisors, which had been pushing for a higher deal price since the summer of 2017. Both Qualcomm's and NXP's boards of directors have approved the revised offer.
So Qualcomm's cash offer grew 16% larger, making up for some lost market opportunity over the last 16 months. Before Qualcomm filed this amendment, NXP investors had seen a 17% return since that initial buyout surge in October 2016. Meanwhile, the S&P 500 benchmark rose 28% higher. And if activist investors hadn't been lobbying for a bigger deal, the original bid of $110 per NXP share would have yielded a measly 8% return over five full quarters.
Qualcomm really wants this deal
Two weeks ago, only 1.5% of NXP's shares had been entered into Qualcomm's tender offer. That was the lowest reading so far, and the negative trend was obvious.
The new agreement will absolutely boost these numbers. For one, 28% of NXP's shares belong to firms that back the new deal in public. That alone would be enough to eclipse the former peak in March 2017, when 17.2% of NXP's shareholders had tendered their shares.
February's extension of the tender offer did send signals of upcoming progress. For one, that extension would have expired at the close of business on Feb. 23. That two-week amendment was a clean break from more than a year's worth of monthly updates.
The activists are not walking away completely satisfied. Elliott was looking for $135 per share, resulting in a $46.5 billion price tag. But $127.50 per share meets Elliott more than halfway. Qualcomm is bending over backwards to add NXP's automotive computing muscle to its own portfolio of mobile and embedded processors.
Approval is still pending in China, putting a cap on Qualcomm's progress. Raising the deal price much earlier could have led to more and higher demands from frustrated investors as the regulatory reviews continued to drag on.
Qualcomm will need to raise some more cash from new debt papers before closing this enlarged deal, but does not envision running into any trouble with that. The company has a rock-solid investment grade credit rating -- A1 according to Moody's and A in Standard & Poor's ratings system.
At current run rates, NXP expands Qualcomm's free cash flows from $4.1 billion to $6 billion. The deal should also unlock some $500 million of annual cost synergies, and the two companies' chip portfolios seem well suited for package deals and cross-selling tactics. Qualcomm has promised the European Commission not to overdo these strategies and I wouldn't be surprised if the company takes a slap on the wrist to correct its anticompetitive tendencies somewhere down the line. Overall, Qualcomm plus NXP adds up to a market-crushing beast.
And of course, raising the bid for NXP throws a wrench in the works for Broadcom (NASDAQ:AVGO) and its efforts to buy Qualcomm in a hostile takeover. Broadcom's credit ratings are weaker than Qualcomm's, so adding more weight to that $121 billion deal could put an end to Broadcom's merger ambitions. Just like Elliott wanted more money for its NXP holdings, Qualcomm says that Broadcom's offer undervalues the target company.
And the beat goes on. The Broadcom-Qualcomm combination remains in limbo, more uncertain than ever. The NXP deal, however, is good to go. Expect the final papers to be signed within a couple of weeks, assuming that the Chinese government is ready to rubber-stamp this merger.