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Acquisition Offers Show Semiconductor Companies’ True Value

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How does Marvell value Cavium?  

The semiconductor industry is in the midst of a consolidation wave that started in 2015 when the volume of deals reached its highest level. In 2017, the volume of deals has fallen but the value of deals has grown significantly. This year witnessed some of the biggest M&A (merger and acquisition) deals, including the Qualcomm (QCOM)–NXP Semiconductors (NXPI) $47 billion deal and now Broadcom’s (AVGO) hostile bid of $105 billion for Qualcomm.

The increasing value of the deals highlights that semiconductor companies value each other a lot. Let’s look at the valuation of some big deals, keeping the Marvell (MRVL)-Cavium (CAVM) deal as our base.

Offer price to 2018 forward earnings

Marvell’s offer of $80 per Cavium share values the latter at 22.50 times its 2018 forward earnings estimates and 5.5 times its 2018 forward sales.

In the QCOM-NXP deal, QCOM is paying $110 per NXP share, which values the latter at just 15x its 2018 forward earnings estimates. Wall Street analysts expect NXP to report EPS of $7.27 in 2018. NXP is currently trading at $116.6, which is 16x its 2018 forward earnings estimates. If Qualcomm gives a reasonable premium of 19x its 2018 forward earnings estimates, it would have to offer NXP shareholders $138 per share.

In the AVGO-QCOM offer, AVGO has offered to pay $70 per QCOM share, which values the latter at 17.5x its 2018 earnings estimates. Wall Street analysts expect NXP to report EPS (earnings per share) of $4.02 in 2018. If Broadcom gives a reasonable premium of 20x its 2018 earnings estimates, it would have to offer Qualcomm shareholders $80.5 per share.

Offer price to 2018 EBITDA

The EPS estimate may not be accurate, as a company with higher leverage would have a lower EPS, lowering its valuation. Taking out the effect of the financial structure of the company, let’s look at the deal’s valuation from the perspective of a forward EBITDA (earnings before interest, tax, depreciation, and amortization).

In the MRVL-CAVM deal, Marvell values Cavium at 14x its estimated fiscal 2018 EBITDA. On the other hand, Qualcomm values NXP at 11.5x its estimated fiscal 2018 EBITDA, and Broadcom values Qualcomm (excluding the pending NXP acquisition) at 12.5x its estimated fiscal 2018 EBITDA. If we look at last seven years’ semiconductor M&A deals of over $100 million, the median value comes in at 15x estimated forward EBITDA.

If Broadcom values Qualcomm at 14x its estimated fiscal 2018 EBITDA, the former would have to pay $79 per Qualcomm share. A survey of Qualcomm shareholders by Bloomberg News showed that shareholders might be interested in selling their shares at $80 per share.

So the acquisition price is the price both investors and bidding companies agree on.

Next, we’ll look at Marvell’s earnings and the financial impact of the Cavium acquisition.

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