Financial Review

Merger Monday

…..Broadcomm-Qualcomm? T-Mobile-Sprint-nope. Disney-21st Century Fox? Intel-AMD – just working together. Bad news for the tax plan – it has been analyzed. Saudi purge.

Financial Review by Sinclair Noe for 11-06-2017

DOW + 33 = 23,572
SPX + 5 = 2592
NAS + 26 = 6790
RUT + 2 = 1497
10 Y – .02 = 2.32%
OIL + 1.73 = 57.37
GOLD + 12.10 = 1282.50

 

Merger mania. We have a list of merger news to talk about. First, Broadcom has offered to buy Qualcomm for $105 billion, or $70 a share in cash and stock. That’s a 28 percent premium over the stock’s closing price on Nov. 2, before we heard reports about talks of a deal. The proposed transaction is valued at approximately $130 billion on a pro forma basis, including $25 billion of net debt. Buying Qualcomm would make Broadcom the third-largest chipmaker, behind Intel and Samsung Electronics. The combined business would instantly become the default provider of a set of components needed to build each of the more than a billion smartphones sold every year. The deal would dwarf Dell’s $67 billion acquisition of EMC in 2015 – then the biggest in the technology industry. This is not a done deal, and there is a strong chance that Qualcomm will try to fend off the unsolicited offer. Qualcomm will likely argue that the proposal is an opportunistic move to buy the chipmaker on the cheap, and it will likely recommend that shareholders reject it.

 

If Broadcom can pull off a deal, it could help smooth things over with Qualcomm’s biggest adversary – Apple, over chip royalties. Apple is demanding discounts on intellectual property royalties, which Qualcomm charges for its patents even if a company buys chips elsewhere. Qualcomm filed lawsuits seeking to ban the sale and manufacture of iPhones in China, which, if granted, would cut off Apple from the world’s largest phone market and cripple production. Last week, Qualcomm executives said the legal process would “proceed under the court’s schedule,” indicating no resolution soon. Broadcom is already a major Apple supplier, and if they can broker a peace deal it could slow Apple’s ongoing efforts to seek other suppliers for its modem chips, such as Intel.  There is also the question of what now happens with Qualcomm’s ongoing effort to buy NXP Semiconductors. Broadcom has said its offer stands whether the NXP deal is completed at the current price of $110 per NXP share, or not. In other words, take it or leave it. Qualcomm rose 2.3%. Broadcom dropped 0.7%.

 

Apple gained 1.2% – but that was probably because of the rollout of the new iPhone X, which was met with long lines of buyers over the weekend. Also today, the US Supreme Court rejected a Samsung appeal of a patent loss to Apple and let stand a lower court ruling that reinstated a jury award of about $120 million in favor of Apple.

 

Sprint and T-Mobile called off merger talks. This marks the second time the third- and fourth-largest wireless carriers have failed to reach a deal. Sprint and T-Mobile said talks ended because they “were unable to find mutually agreeable terms.” A combination with T-Mobile, the third-largest US wireless carrier, would have enabled No. 4 Sprint to cut costs and forge a bigger competitor to take on AT&T and Verizon. Another reason the deal seemed possible is that Sprint has a boatload of debt. About half of Sprint’s debt and obligations is coming due over the next four years and the company is also facing costly investments into next-generation wireless technology. One clue to what the future holds is an agreement announced Sunday that allows cable operator Altice USA to sell wireless service using Sprint’s network. Under the deal, Sprint will use Altice’s broadband infrastructure to strengthen its nationwide network. Sprint dropped 10%. T-Mobile dropped 6%.

 

The media corporation 21st Century Fox has been in talks to sell most of itself to Disney.  An acquisition would leave 21st Century Fox with a smaller, more focused portfolio of news and sports networks. A deal would exclude the Fox broadcast network because Disney could not own two broadcast networks. (Disney acquired ABC in 1996.) Disney was reportedly interested in buying Fox assets including its studio division, partial ownership of the UK telecoms company Sky, and networks such as National Geographic and FX. Both companies aren’t in talks now but could resume them. Disney could benefit from 21st Century Fox’s television properties as it gets ready to launch a streaming service. Disney announced in August that it would end its exclusive movie deal with Netflix in 2019 and launch an ad-free, Disney-branded streaming service.

 

Rivals Intel and Advanced Micro Devices (AMD) are teaming up to produce a laptop computer chip that uses an Intel processor and an AMD graphics unit. The partnership will pit the two companies against competitor Nvidia. The new chip will be made for laptops that are designed to be thin and portable, but still powerful enough for gamers who need a stronger option to play intensive games. It’ll be part of Intel’s eighth-generation Intel Core line and marks Intel and AMD’s first partnership since the 1980s. Intel gained 1.2%. AMD added 7%. Nvidia was up slightly.

 

Companies continue to report their quarterly earnings. With more than 400 of S&P 500 companies having reported, earnings for the third quarter are expected to have climbed 8 percent, compared to an expectation of a 5.9 percent rise at the start of October, according to Thomson Reuters.

Michael Kors jumped 15% after the fashion accessories maker raised its 2017 revenue forecast. The stock was the biggest percentage gainer on the S&P.

 

Republican lawmakers began revising their proposed overhaul of the tax code. No surprise. Although Republicans generally support the bill’s broader themes, including a sharp reduction in the corporate income tax, they are torn over other elements, including the repeal of the deduction for state and local income tax (SALT) payments. Kevin Brady, chairman of the tax-writing House Ways and Means Committee, pledged to change the bill’s approach to the “carried interest” loophole by lengthening the time an asset would have to be held to qualify for the lower rate. Carried interest is a share of an investment fund’s profits – typically about 20 percent beyond the return guaranteed to investors – that goes to the general partners of private equity, venture capital and hedge funds. The Senate is developing its own version of the tax legislation which would have to eventually be reconciled with the House version before it is sent to Trump for signing.

 

Still, more bad news for the tax plan. The House Republican tax proposal would on average reduce taxes for all income groups next year, but within 10 years nearly 30 percent of taxpayers would see taxes rise, according to a report released Monday. The majority of deductions eliminated, however, come on the individual side of the tax code. Among the breaks eliminated include the state and local income tax deduction, breaks for medical expenses, the deduction of student loan interest and adoption expenses. The Tax Policy Center said that in 2018, individual taxes would be cut by $1,100 on average across income groups, with higher income taxpayers getting a bigger boost. Taxpayers making less than $48,000 would see what they called “modest” tax cuts of 0.3 to 0.5 percent while those in the top 1 percent would see a cut of 2.5 percent, or $37,000 on average, according to the analysis. For the lowest 20 percent of earners, that’s about a cut of $40 in annual taxes paid. For the top 20 percent, that’s a cut of about $4850 in taxes paid.

 

Still, a group of taxpayers, some 12 percent, would see taxes rise in 2018. By 2027, the average tax cut would be about $700 or 0.7 percent, with those earning less than $55,000 seeing a slight increase in their taxes and those in the top 1 percent seeing a 2.2 percent boost to their after-tax income — nearly 50 percent of the total benefit.

 

A campaign of mass arrests of Saudi Arabian royals, ministers and businessmen expanded today after a top entrepreneur was reportedly detained in the biggest anti-corruption purge of the kingdom’s affluent elite in its modern history. The detentions, framed as part of a sweeping crackdown on corruption following a royal decree that mandated a Supreme Committee headed by Mohammed bin Salman to address the issue, represent the latest in a series of bold moves by a youthful crown prince who has centralized authority to a degree unprecedented in recent Saudi history. The roll-call of the detained reads like a who’s who of the Saudi policymaking community.  The kingdom has pared back important but painful domestic economic reforms and been distracted by its blockade of Qatar and long-running war in Yemen. Now the abrupt internal purge has left experts wondering whether it is truly aimed at corruption or at Mohammed’s political rivals. the upcoming transition from the current king, Salman, to his son, Mohammed bin Salman, will be a unique one. The crown prince, who will be the first of the next generation to rule, is only 32. The current king is 81 and reportedly struggles with health problems—both physical and mental—so the transition could come soon, either through Salman’s death or his abdication. But Mohammed’s elevation over more senior and experienced uncles and cousins—he’s the third heir apparent since Salman’s reign began in 2015— has undoubtedly ruffled some feathers, and he has a lot of competition.  The arrests are likely a signal that the young king-in-waiting is not waiting until he inherits the throne to start exercising power. No telling how all this plays out, and if the crown prince will be successful, but we’ll probably look back on the events of the past few days as the beginning of a new era – one way or the other.

 

 

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