Qualcomm (QCOM) – Tender Offer – 5% Upside

Current Price – $64.09

Tender Price – $60.0 – $67.5

Upside – 5.3% (if priced at the upper limit)

Expiration Date – August 27th, 2018

SEC Filling

 

After failed NXP acquisition Qualcomm right away announced stock repurchase program of $30bn to be implemented during the upcoming year. This is a staggering  32% of the company, so definitely one of the largest buyback programs within the large cap space. On top of that management promised to implement it in relatively short time period.

QCOM kicked off this program by launching $10bn dutch tender offer (11% of the company) at $60-$67.5. My expectations are for the tender to be priced closer to the upper limit purely because there will still be another $20bn left in the buyback after this tender and investors should be expecting either further tenders or open market purchases. So I do not think all investors will jump to the current tender opportunity and push the price towards the lower limit.

At the same due to large size of the tender there should be plenty of institutional arbitrageurs involved and therefore tender will most likely be priced below the upper limit (as arbitrageurs will tender below this limit to increase probability of shares being accepted).

So as is often the case with these tenders the trade is based more on technical aspects rather than fundamentals of the company. The downside risk should be minimal here even in the case the shares are prorated or not accepted at all.

In the most optimistic scenario, the tender will be under-subscribed which will right away push the shares beyond the upper limit and non-tendering shareholders will profit the most.

The case for GHL - up 70% since buyback announcement and only implemented tiny portion of the buyback – nicely illustrates what happens when company promises to buyback large portion of the outstanding shares.

During tenure of current QCOM CEO Steve Mollenkopf (4+ years) share price has declined by 19% despite material share repurchases and 13% reduced share count. His biggest bet – two year drama of NXP acquisition – has also failed. So he should be quite eager to pursue this buyback aggressively.

There is an odd lot provision with $340 upside if shares end up priced at the upper limit.

13 COMMENTS

  1. makarid

    dt, about the arbitrage traders,they short the QCOM,is that right? So in order to close their position they need to buy shares not to sell.

    1. dt

      I am not referring to QCOM/NPXI arbitrageurs, but those who will also try to profit from this tender as it is quite substantial.

  2. YHC

    dt, so what will be a good strategy in your view? could you do a comparison studies with GHL and see how likely this will follow the trajectory of GHL

    1. dt

      I am not able to advice you on a good strategy. I own QCOM and intend to tender at or close to the upper limit – whether this is a good strategy or no everyone should judge for him-/herself.

      I do not think this will play out exactly like GHL – although there are similarities in terms of the size of repurchase program, companies are in quite different situations and have very different investor base. Also quite importantly GHL was a heavily shorted stock before they started the buyback program. But I think GHL case gives a good illustration of downside protection during the period of the buyback program.

  3. dt

    My position got closed yesterday when QCOM traded up above $67/share – remaining upside for tender participants is quite tiny, especially taking into account potential proration and potential share decline after the tender.

    Overall 5% return in 3 weeks.

    However, tender might turn out under-subscribed, especially if share prices break the $67.5 upper limit before expiration. This would like cause share price to jump after the announcement in expectation of another tender at higher prices. So not tendering at all (or getting OTM call options) might turn out to be lucrative strategy here.

    1. dt

      I would call it ‘a lot better’. Only half of the tender was filled at upper limit. So out of the announced $30bn buyback, so far only $5bn has been done. The remaining $25bn will need to be carried out at much higher prices. Seems quite similar to GHL scenario, just not as exaggerated.

    1. makarid

      The news saying: “repurchase an aggregate of $16B of company’s common stock, with an initial delivery of approximately 178M shares”. Does this mean that they will purchause with an average share price of $89.88? Thanks

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