Publication Date: June 19, 2017
Risk arbitrage and event driven hedge funds collectively hold around $7.3bn worth of NXP on the belief that downside is minimal, if not positive, in the event of a failed transaction. While we hope that antitrust reviews clear without issues and that negotiations between NXP, its shareholders and Qualcomm lead to an increased offer, we cannot blindly consider NXP as a riskless trade. The two schools of thought on an appropriate break price for NXP lead to two vastly different conclusions. First, the belief among most hedge funds is that a bullish break price should take precedence - they contend that NXP no longer incorporates a takeover premium and that downside is negligible as, using any set of semiconductor comps or relevant indices, the sector has rallied 25-35% since NXP/Qualcomm takeover discussions were first made public in September 2016. Second, and in the minority, are more conservative NXP investors – they do not solely consider the share price performance of NXP’s peers and do not indiscriminately attribute a break price based on share price moves; instead, they caution that NXP previously traded at a discount to comps on financial multiple metrics and that NXP’s recent operating performance has been of lesser quality than its peers. This is backed by NXP’s mediocre quarterly financials reported and its declining consensus estimates, which leads to a lower break price. This report does not assess the likelihood of a bump by Qualcomm or antitrust approval. Instead, it investigates one of the most important considerations of this risk arbitrage situation - the potential break price, where NXP may trade should the transaction fail. We scrutinise the notion that NXP is a “riskless” opportunity and frequently look beyond standard break price valuation approaches. We believe that funds long NXP should consider more conservative break price assumptions, which may lead some to re-visit their risk limits and think twice about the size of their positions. NXP’s operations have not been stellar and its standalone valuation should reflect its shortfalls versus the sector.
1. An Appropriate Comp Universe 2. Break Price Analysis: Bullish Considerations 3. Break Price Analysis: Bearish Considerations 4. Thoughts on a Legitimate Break Price Appendix A. NXP Semiconductors: Company Snapshot and Business Divisions
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