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NXP shareholders owe a big ‘thank you’ to Broadcom’s CEO

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“Certainty on NXP was important to Qualcomm and its shareholders,” Tom Horton, presiding director of the Qualcomm board of directors, told CNBC today.

ISS determined Qualcomm’s forecast of $5.25 in adjusted earnings per share for fiscal year 2019 is “feasible,” given NXP’s expected adjusted net income of $2.7 billion, or $1.84 per share on a pro forma basis. That’s crucial to Qualcomm’s case that it’s better off as an independent entity than selling to Broadcom for $82 a share.

Qualcomm says Broadcom’s offer significantly undervalues the company, assuming it can favorably resolve its ongoing litigation with Apple. Buying NXP allows Qualcomm to argue $5.25 in adjusted EPS is a reasonable benchmark.

Horton said past semiconductor deals have been completed with an EPS multiple of 22, which would value Qualcomm, using a projected EPS number of $6.75 (with $1.50 per share added for the Apple resolution), at a whopping $148.50 per share — well above what Broadcom has been willing to offer.

Broadcom has argued $4.50 EPS is a more reasonable guidance, even after NXP completion, and resolution with Apple will only generate up to extra $1 in EPS accretion, according to ISS.

Qualcomm secured backing from NXP shareholders controlling about 28 percent of the company with its new offer, including activist hedge fund Elliott Management, which has championed a higher bid for months. Qualcomm also lowered the minimum tender threshold to 70 percent from 80 percent to help it close a deal.

Broadcom has said its offer to buy Qualcomm for $82 a share — or more than $121 billion — is contingent on the NXP deal falling apart or it getting done at the previous price of $110 per share.

Tan told CNBC that NXP “would not solve Qualcomm’s problems” in a Feb. 12 interview. Broadcom is “evaluating its options” after Qualcomm’s increased NXP offer, it said in the statement. Qualcomm is still waiting on Ministry of Commerce in China approval as a final regulatory hurdle with its NXP deal.

Qualcomm had internally debated a smaller raise to acquire NXP before it officially increased its bid to $127.50, said several people. Qualcomm said in a statement the new price reflects NXP’s recent performance, strong market dynamics, and high confidence in annualized cost synergies of at least $500 million “resulting from insights gained” during the companies’ integration discussions and research.

NXP “earnings are up 20 percent from the time we did the deal,” Horton said to CNBC. “And we raised the bid 16 percent. So it’s actually at a lower multiple than the deal when it was originally announced.”

A spokesman for Qualcomm declined to comment further.

Indeed, NXP shareholders who asked Qualcomm for more, including Elliott, have pointed to NXP’s strong performance and the relative stock moves from NXP comparables, including Broadcom, which itself is up 45 percent since the NXP deal announcement on Oct. 27, 2016.

“Qualcomm’s board of directors and management have transferred $4.10 per Qualcomm share from Qualcomm stockholders to NXP stockholders, representing approximately $6.2 billion of value,” Broadcom said in a statement Tuesday. “This revised price for NXP is well beyond what Qualcomm has repeatedly characterized as a ‘full and fair’ price.”

The higher offer also bucks a recommendation from ISS, which said in its report last week that Qualcomm could negotiate provisions with Broadcom to close the NXP deal at a mutually agreed-upon price. ISS recommended Qualcomm shareholders should nominate four of Broadcom’s six recommended new directors to help facilitate discussions between the two companies on a higher takeout price for Qualcomm. Broadcom has already said its current offer is “best and final.”

Glass Lewis, another proxy advisory firm, today recommended Qualcomm shareholders vote for all six director nominees Broadcom is putting forward, effectively endorsing a Broadcom takeover. Glass Lewis also said an NXP increase “would be to the detriment of Qualcomm shareholders.”

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China sanctions Trump Commerce Secretary Wilbur Ross

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China said Friday it has sanctioned seven people, including former Trump Commerce Secretary Wilbur Ross, in response to U.S. penalties imposed on Chinese officials over Beijing’s clampdown on democracy in Hong Kong. 

The reciprocal sanctions were imposed under China’s new Anti-Foreign Sanctions Law, which was passed in June. The sanctions are a response to the United States’ recent warning to companies about the risks of doing business in Hong Kong.

They also came days before Deputy Secretary of State Wendy Sherman is to visit China, making her the most senior U.S. official to visit China during the Biden administration. 

In addition to Ross, others sanctioned include Carolyn Bartholomew, chair of the U.S.-China Economic Security Review Commission; Jonathan Stivers, former staff director of the Congressional Executive Commission on China; and Sophie Richardson, Human Rights Watch’s China director. 

Also sanctioned were DoYun Kim at National Democratic Institute for International Affairs; Adam Joseph King, senior program manager of the International Republican Institute and the Hong Kong Democratic Council. 

Ross, a billionaire businessman and investor, has done business in China. As Commerce secretary, he was one of the faces of former President Donald Trump’s trade war with China.

“I would like to stress once again that Hong Kong is China’s Special Administrative Region and its affairs are an integral part of China’s internal affairs,” Foreign Ministry spokesperson Zhao Lijian said in a statement. “Any attempt by external forces to interfere in Hong Kong’s affairs would be as futile as an ant trying to shake a big tree.”

White House press secretary Jen Psaki said at a Friday press briefing that the U.S. is aware of China’s newest sanctions.

“We are undeterred by these actions and we remain fully committed to implementing all relevant U.S. sanctions on authorities,” Psaki said at the briefing. “These actions are the latest examples of how Beijing punishes private citizens, companies and civil society organizations as a way to send political signals and further illustrates the PRC’s deteriorating investment climate and rising political risks.”

Psaki said it follows China’s “baseless sanctioning” of two commissioners from the U.S. Commission on International Religious Freedom in March, 28 U.S. officials in January as well as sanctions on U.S. officials and organizations in July 2020. 

The Chinese Embassy in Washington didn’t immediately respond to a request for comment. The State Department did not immediately respond to CNBC’s request for comment.

Lijian said Friday that China “firmly opposes and strongly condemns” the Biden administration’s issuance of the Hong Kong Business Advisory last week, which warns that U.S. firms are facing several risks posed by China’s sweeping national security law in Hong Kong. 

“These acts gravely violate international law and basic norms governing international relations, and severely interfere in China’s internal affairs,” Lijian said in the statement. 

China’s national security law was passed in June 2020 and has been condemned by Washington for aiming to limit Hong Kong’s autonomy and banning literature that is critical of the Chinese Communist Party. 

A Biden administration advisory, published jointly by the departments of State, Treasury, Commerce and Homeland Security, says businesses face risks of warrantless electronic surveillance, surrendering data to authorities and “restricted access to information.”

It also sanctioned several Chinese officials with Beijing’s liaison office in Hong Kong for limiting autonomy in the territory. 

“Beijing has chipped away at Hong Kong’s reputation of accountable, transparent governance and respect for individual freedoms, and has broken its promise to leave Hong Kong’s high degree of autonomy unchanged for 50 years,” Secretary of State Antony Blinken said in a statement about the advisory. 

The Hong Kong warning came days after the Biden administration issued a similar advisory for firms with businesses and operations in Xinjiang province, where there is growing evidence that the Chinese government has carried out genocide and other human rights abuses against Uyghurs and other Muslim minorities.

The relationship between Beijing and Washington became even more strained under the Trump administration, which provoked a trade war and worked to ban Chinese technology companies from doing business in the U.S. 

Biden has previously said that his approach would differ from his predecessor’s, stating that he would work closely with allies to push back against Beijing.

The Chinese sanctions on Ross came soon after the Department of Justice declined to prosecute him for allegedly misleading Congress about census citizenship questions.

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The rapid growth the U.S. economy has seen is about to hit a wall

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A National Park Service worker replaces a flag at the Washington Monument which reopened today following a six month closure due to COVID-19 safety measures, in Washington U.S., July 14, 2021.

Kevin Lemarque | Reuter

The U.S. economy is expected to post another roaring growth spurt in the second quarter, before a slow and steady dose of reality starts to sink in.

Gross domestic product is projected to accelerate 9.2% for the April-to-June period, according to a FactSet survey.

In a pre-pandemic world, that would have put annualized growth at its fastest level since the second quarter of 1983. However, the current circumstances and the outsized policy response they generated make this merely the third straight quarter of GDP that sits well above the post-Great Recession trend.

Things are about to change, however.

The economy is creeping back towards normal, the open checkbook from Congress is about to get tighter, and millions of sidelined American workers will be returning to their jobs. That means a gradual reversion to the mean for an economy more used to growing closer to 2% than the much stronger levels it has turned in during the reopening.

“Growth has peaked, the economy will slow a bit in the second half of this year, then much more noticeably in the first half of 2022 as fiscal support fades,” said Mark Zandi, chief economist for Moody’s Analytics. “The contours of growth are going to be shaped largely by fiscal policy over the next 18 months. The tailwind just blows less strongly, and may stop altogether by this time next year.”

It’s been a long road getting here, but the economy has gotten very close to its pre-pandemic self.

In fact, according to a running gauge that Jefferies keeps, overall output is at 98.6% of its “normal” level before Covid-19 turned everything upside down. The firm uses a slew of indicators to measure then versus now, and finds that while some areas such as employment and air travel are lagging, retail and housing have helped push overall activity to just below the 2019 level, at 98.6%.

“When I look holistically at household income dynamics and balance sheets, I see a very, very positive situation, very healthy fundamentals, and it’s hard to be pessimistic on the outlook,” said Aneta Markowska, chief financial economist at Jefferies.

Indeed, household net worth totaled $136.9 trillion at the end of the first quarter, a 16% increase from its 2019 level, according to the Federal Reserve. At the same time, household debt payments compared to disposable personal income fell to 8.2%, a record low going back to 1980.

But much of that net worth has been driven by increases in financial assets such as stocks, and personal income has swelled due to government stimulus payments that are slowing and eventually will stop.

Demographics holding back growth

Gasoline prices at a Royal Dutch Shell Plc gas station in San Francisco, California, U.S., on Wednesday, July 7, 2021.

David Paul Morris | Bloomberg | Getty Images

Inflation combined with fading fiscal support also then will serve as a growth limit.

“The economy is facing supply constraints with residential investment likely a drag and the change in inventories remaining negative,” Bank of America U.S. economist Alexander Lin said in a note. “Looking ahead, this is likely the peak, with growth cooling in the coming quarters.”

Capital Economics forecasts a below-consensus 8% GDP figure for the second quarter, then a drop to 3.5% in the following period.

“With surging prices squeezing real incomes we suspect the pace of monthly growth will remain lackluster, setting the stage for a sharp slowdown in consumption and GDP growth in the third quarter,” wrote Paul Ashworth, chief North American economist at Capital Economics.

The pandemic is another wildcard.

Cases of the delta variant are spiking in a handful of states, and health officials worry that the U.S. could face a wave like the one hitting some European and Asian countries. Few if any economists expect another wave of lockdowns or similar constraints in the U.S., but pressure from abroad could hit domestic growth.

“Export platforms like Vietnam are being locked down now,” Brusuelas said. “Vietnam is becoming a more important cog in the global supply chain, so we are watching that closely.

Brusuelas added that the negotiations over the debt ceiling also could shake up things in the U.S. Yellen said Friday that extraordinary measures the U.S. may need to take to continuing paying its debts could hit troubles as soon as October.

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Manchester United sign Jadon Sancho from Borussia Dortmund for £73m

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Jadon Sancho is unveiled at Manchester United’s Carrington Training Ground on July 23, 2021.

Ash Donelon | Manchester United | Getty Images

Manchester United have signed Jadon Sancho from Borussia Dortmund for £73m.

Sancho, whose move to Old Trafford was agreed in principle on July 1, completed a medical earlier this month after his participation at Euro 2020.

He has signed a five-year deal at United, with an option of a further year.

The 21-year-old joins the Premier League club after four years in the Bundesliga with Dortmund, where he won the German Cup in his final season and scored 50 goals across 137 appearances.

Manchester City retain a sell-on clause for their former youth-team player, whose contract in Germany was due to run until the summer of 2023.

“I’ll always be grateful to Dortmund for giving me the opportunity to play first-team football, although I always knew that I would return to England one day,” Sancho told United’s official website.

“The chance to join Manchester United is a dream come true and I just cannot wait to perform in the Premier League.

“This is a young and exciting squad and I know, together, we can develop into something special to bring the success that the fans deserve.

“I am looking forward to working with the manager and his coaching team to further develop my game.”

United had a long-standing interest in Sancho and attempted to sign him last summer, but were put off by Dortmund’s £108m valuation.

Dortmund’s asking price for Sancho dropped to £85m by the start of this summer, with United able to negotiate a further £12m drop in the valuation.

Sancho becomes Ole Gunnar Solskjaer’s second signing ahead of the new season following the addition of goalkeeper Tom Heaton earlier in the transfer window.

Solskjaer added: “Jadon epitomises the type of player I want to bring to the club, he is a forward player in the best traditions of Manchester United.

“He will form an integral part of my squad for years to come and we look forward to seeing him blossom.

“His goals and assists records speak for themselves and he will also bring tremendous pace, flair and creativity to the team.”

It could be argued Ole Gunnar Solskjaer’s side have more pressing needs in other areas. Many fans might prefer a central defender.

But Sancho has emerged as one of the world’s most exciting young players in recent years and it is easy to understand why United were so determined to finally get their man.

Manchester United will host rivals Leeds United at Old Trafford on the opening weekend of the 2021/22 Premier League season.

United face a possibly season-defining run of games in October and November, which starts with a trip to Leicester on October 16, the first showdown with Liverpool at Old Trafford on October 23, and a visit to Tottenham on October 30.

November 6 marks the first Manchester derby of the season as champions Manchester City travel to Old Trafford, before United head to Champions League winners Chelsea on November 27 before rounding off the month by hosting Arsenal on November 30.

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