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Broadcom Launches Bid for Qualcomm: Semiconductor ETFs Surge

Another wave of mergers and acquisitions has lashed on the hot semiconductor space. This is especially true as communications’ chipmaker Broadcom AVGO has make an unsolicited bid to acquire the smartphone chip supplier Qualcomm QCOM for $70 per share or $130 billion, including debt. The news was first flashed on Bloomberg last week.

Under the terms of the bid, Broadcom would pay $60 per share in cash and $10 per share in Broadcom stock. This represents a 13% premium to Friday's closing price of $61.81.

By acquiring Qualcomm, Broadcom could become the third-largest chipmaker, behind Intel Corp. INTC and Samsung Electronics. This is because the combination would mix Qualcomm’s dominance of chips that connect handsets to wireless networks with Broadcom’s expertise in chips that link devices to Wi-Fi networks (read: Here's What Investors Need to Know About Soaring Semiconductor ETFs).

The combination would represent the biggest technology acquisition in history, dwarfing Dell Inc.’s $67 billion buyout of EMC in 2015. In addition, Broadcom is also expected to acquire NXP Semiconductors (NXPI), which Qualcomm agreed to buy in 2016 for $38 billion. The takeover is yet to be completed due to an ongoing antitrust investigation.

The Broadcom-Qualcomm deal, if struck, would face heavy regulatory scrutiny given their sheer size, and heavy level of consolidation in the chip industry. The Bloomberg report came in a month when an ongoing legal battle with Apple AAPL over wireless chip pricing, patents and alleged anticompetitive behavior has led to weak trading in Qualcomm’s stock. Before the report, shares of QCOM were down 16% this year compared with a 41% surge in the Philadelphia Semiconductor Index (read: Take a Bite of Apple's Blowout Earnings With Top-Ranked ETFs).

Market Impact

The news has led to rise of 3.7% in Qualcomm shares in pre-market trade at the time of writing while Broadcom is up 1.1%. The Bloomberg report propelled Qualcomm shares up as much as 19% on Friday, the biggest one-day move since October 2008 and made it the best performing stock on the S&P 500 index on Friday. The stock crushed its average daily volume figure as it exchanged about 81 million shares in hand compared with 9.2 million shares on average. Meanwhile, Broadcom shares rose about 5.5% on the day on elevated volumes of 12 million compared with the 2.8 million average.

Notably, QCOM has a market capitalization of $91 billion while AVGO has a market cap of $112 billion.

Given the expected deal, investors seeking to ride out the surging corner of the broad tech space in a diversified way could consider the following ETFs. Any of these funds could make for a compelling choice as most of these surged to new record highs following the news. The trend is likely to continue in the days ahead given their Zacks ETF Rank #1 (Strong Buy), suggesting their continued outperformance.

Moreover, these products gained more than 1% on the day following the Bloomberg report and outpaced the gain of 0.95% for the broad tech fund PowerShares QQQ QQQ, which targets the Nasdaq-100 Index (see: all the Technology ETFs here).

iShares PHLX Semiconductor ETF SOXX

This ETF follows the PHLX SOX Semiconductor Sector Index and offers exposure to 30 firms. Of these, QCOM and AVGO take the fourth and fifth positions in the basket with a combined 15.53% share. The fund has amassed $1.2 billion in its asset base and trades in solid average volume of around 478,000 shares a day. It charges 48 bps in fees a year from investors and gained 1.8% on the day.

VanEck Vectors Semiconductor ETF SMH

This fund provides exposure to 26 securities by tracking the MVIS US Listed Semiconductor 25 Index. Qualcomm occupies the eight position in the basket while Broadcom takes the tenth spot with a combined 9.5% of assets. The product has managed assets worth $989.6 million and charges 36 bps in annual fees and expenses. It is heavily traded with a volume of around 3.2 million shares per day and has gained 1.1% following the Bloomberg report (read: Best ETFs & Stocks from October's Top Performing Sector).

SPDR S&P Semiconductor ETF XSD

This fund tracks the S&P Semiconductor Select Industry Index, a modified equal-weighted index. It holds 47 stocks in its portfolio with QCOM and AVGO accounting for nearly 3% share each. The ETF is less popular and illiquid with AUM of $344.1 million and average daily volume of 78,000 shares. It charges 35 bps in fees per year and was up 1.3% on the day.

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QUALCOMM Incorporated (QCOM): Free Stock Analysis Report
 
Apple Inc. (AAPL): Free Stock Analysis Report
 
Broadcom Limited (AVGO): Free Stock Analysis Report
 
NASDAQ-100 SHRS (QQQ): ETF Research Reports
 
ISHARS-PHLX SEM (SOXX): ETF Research Reports
 
VANECK-SEMICON (SMH): ETF Research Reports
 
SPDR-SP SEMICON (XSD): ETF Research Reports
 
Intel Corporation (INTC): Free Stock Analysis Report
 
NXP Semiconductors N.V. (NXPI): Free Stock Analysis Report
 
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