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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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Asia-Pacific markets set for lower open after overnight Wall Street drop

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SINGAPORE — Stocks in Asia-Pacific looked set to see opening declines in Friday morning trade following an overnight drop on Wall Street.

Futures pointed to a lower open for Japanese stocks. The Nikkei futures contract in Chicago was at 28,940 while its counterpart in Osaka was at 28,900. That compared against the Nikkei 225’s last close at 29,188.17.

Shares in Australia also looked poised to slip, with the SPI futures contract at 7,010, compared with the S&P/ASX 200’s last close at 7,055.40.

Investors will continue to monitor the coronavirus situation in India, on Friday, after more than 310,000 new daily infections were registered on Thursday.

Biden reportedly seeks capital gains tax hike

Currencies

The U.S. dollar index, which tracks the greenback against a basket of its peers, was at 91.333 — off levels below 91.2 seen earlier in the week.

The Japanese yen traded at 107.96 per dollar, still stronger than levels above 108.4 against the greenback seen earlier this week. The Australian dollar changed hands at $0.7706, following its slip yesterday from around $0.776.

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Warren, Rubio, Smith push to secure U.S. drug supply chain after Covid

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Sen. Elizabeth Warren, D-Mass., right, and Tina Smith, D-Minn., talk with attendees of the a Senate Health, Education Labor and Pensions Committee hearing on September 25, 2018.

Tom Williams | CQ-Roll Call, Inc. | Getty Images

Sens Elizabeth Warren, Tina Smith and Marco Rubio reintroduced two pieces of legislation on Thursday to secure the U.S. pharmaceutical supply chain by reducing dependence on China and other nations for the supplies needed to make life-saving drugs and vaccines.

The Food and Drug Administration estimates that 80% of the manufacturers that produce ingredients for drugs are located outside the U.S., many in China and India. While the agency has been closely monitoring the supply chain, it does not have a clear understanding of where drug components are made.

The U.S. faced shortages for drugs used to treat Covid-19 patients during the pandemic as demand surged but supply was disrupted due to factory closures and shipping delays.

 “To defeat the current COVID-19 crisis and better equip the United States against future pandemics, we must boost our country’s manufacturing capacity,” Warren, D-Mass., said. “Our bill will end our overreliance on foreign countries and give us the tools we need to produce the critical drugs that millions of Americans depend on here at home.”

Warren and Smith, D-Minn., first introduced the Pharmaceutical Supply Chain Defense and Enhancement Act in June 2020.

The bill requires the Food and Drug Administration commissioner and the secretary of Defense to develop a confidential list of “critical drugs,” provides $5 billion for investments in domestic production and requires drugmakers to report the source of their materials to the FDA.

Senators Warren and Rubio, R-Fla., are also re-upping legislation first introduced last year to direct the Federal Trade Commission and the U.S. Treasury to conduct a study through the Committee on Foreign Investment in the United States.

“COVID-19 has made it painfully clear that we must pass meaningful legislation in order to help rebuild our nation’s medical manufacturing and pharmaceutical sector,” Rubio said.

The bill aims to understand how foreign direct investment from abroad affects the nation’s ability to produce drugs, as well as U.S. genome sequencing and DNA storage.

President Joe Biden’s American Jobs Act calls for $30 billion in investments to protect Americans from future pandemics, which includes efforts to bring back pharmaceutical ingredient manufacturing to the U.S.

Lawmakers worry that foreign manufacturers could restrict or even completely cut off the supply of critical drug components as geopolitical tensions rise. Bad actors could tamper with drugs to make them ineffective or weaponize them.

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Semiconductor shortage could dent GDP growth, boost inflation

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China laid out seven “frontier” technologies in its 14th Five Year Plan. These are areas that China will focus research on and include semiconductors and brain-computer fusion.

Yuichiro Chino | Moment | Getty Images

Economic growth could slow and inflation is likely to see at least a momentary bump higher as the semiconductor shortage worsens, economists say.

A variety of factors have converged to make the coveted computer chips scarce. Soaring demand coupled with supply bottlenecks have led to a situation in which orders for everything from cars to televisions to touch-screen computers and more are on backup for six months or more.

With semis at the core of so much U.S. economic activity, the ongoing supply problems are likely to have ripples.

Goldman Sachs economists say that for the bulk of 2021, the shortage will translate into an inflationary tax that could result in prices rising as much as 3% for affected goods. That would boost inflation as much as 0.4 percentage points through the rest of the year, the firm said.

“Taken together, while we see relatively modest implications of the semiconductor shortage for GDP growth and the industrial sector, it represents another reason to expect core goods inflation to remain firm this year,” Goldman economist Spencer Hill said in a note.

Even though the hit won’t cause a dramatic slowdown to an economy expected to roar in 2021, the impact could still be noticeable. Goldman said the impact could reach as high as a 1% subtraction from activity, but likely will be closer to 0.5%.

Disruptions to the ‘new oil’

“While semiconductors account for only 0.3% of US output, they are an important production input to 12% of GDP,” Hill said, nothing that the shortage could cut auto production by 2% to 6% this year.

Indeed, multiple automakers have curtailed production due to lack of chips vital to their vehicles.

Stellantis NV said it will be temporarily laying off workers at its Detroit Jeep plant, while Volvo also has said the chip issues will cause it to shut some plants until the situation is resolved.

The knock-on impacts of any disruptions in the semiconductor industry are becoming increasingly apparent.

“As the world becomes more interconnected, more automated and greener, each unit of GDP growth will contain a higher content of semiconductors. Integrated circuits are becoming the key commodity input for economic activity,” wrote TS Lombard economist Rory Green.

Green calls semis the “new oil” for the global impact that disruptions can cause.

“The current severe shortage of semiconductors, which is halting automotive production worldwide, underscores the speed and scale of the changes under way,” he said. “Chips have always been an important part for manufacturing and consumer electronics, but their use will broaden to transport and digital services.”

Still, Goldman’s Hill said the inflationary impact likely won’t last far as supply increases later this year and into 2022. But the shortage now “represents another reason to expect core goods inflation to remain firm this year,” he said.

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