Semiconductor shake-up: How to profit from Qualcomm's potential takeover of Intel
by Jinta Hong, CFA
Last Friday, $Qualcomm (QCOM.US)$ reportedly is in talks with $Intel (INTC.US)$ regarding a potential acquisition, which would rank as one of the largest-ever semiconductor mergers if the deal were to take place. Intel's shares closed up 3.3%, while Qualcomm's shares fell by 2.9% following the rumor. Qualcomm has a strong advantage in smartphone processor design, while Intel has a solid foundation in PC chips and manufacturing capabilities. The acquisition could potentially achieve a complementary integration. In the increasingly competitive chip industry, the rise of competitors like $NVIDIA (NVDA.US)$ has put immense pressure on both Intel and Qualcomm. The acquisition might be a strategic response to this competition.
What is an event-driven strategy?
An event-driven strategy is an investment approach that seeks to capitalize on market price movements triggered by specific events such as mergers, restructurings, and bankruptcies. The Qualcomm and Intel case falls under merger arbitrage. Merger arbitrage involves buying the target company's stock (Intel in this case) and shorting the acquiring company's stock (Qualcomm in this case).
A recent example of a similar situation is Miniso's announcement on Sep 23 of its acquisition of a 29.4% stake in China supermarket Yonghui Superstores for 6.27 billion RMB. Following the announcement, Miniso's stock fell by over 16% on the US market, while Yonghui Superstores' shares in China market hit the 10% upper daily limit. If you can accurately anticipate such acquisitions and bet in the right direction, substantial profits can be made. China stocks rally on policy easing: Boon or bane? Learn More>> So, what strategies can we employ in the case of Intel and Qualcomm?
How to trade on mergers if you anticipate the takeover will succeed?
TF International Securities analyst Ming-Chi Kuo pointed out that Qualcomm has only $13 billion in current assets, and this acquisition would impose significant financial pressure on Qualcomm. The acquisition of Intel would have an immediate negative impact on Qualcomm's profitability, potentially reducing its net profit margin from over 20% to single digits, or even resulting in losses. If the acquisition succeeds, it would be favorable for Intel in the short term, while Qualcomm's stock is likely to face downward pressure.
Strategy : If you anticipate the takeover will not succeed, you can short-sell Qualcomm while purchasing Intel. For investors that do not want to short-sell, you can buy put options on Qualcomm while buying call options on Intel, ideally with longer expiration dates due to uncertain timeline of acquisition events.
How to trade on mergers if you anticipate the takeover will fail?
Stifel analyst Ruben Roy noted in a research report that the deal is unlikely to gain regulatory approval. Roy cited similar large-scale transactions that failed to overcome strict regulatory, including Nvidia's acquisition of ARM, $Broadcom (AVGO.US)$'s attempted acquisition of Qualcomm, and Qualcomm's attempted acquisition of $NXP Semiconductors (NXPI.US)$ . If the acquisition fails, Qualcomm can invest the money in projects that may yield higher returns, such as AI area, which would be more financiallly beneficial for Qualcomm in the short term.
Strategy: If you anticipate the takeover will fail, you can shortsell Intel while buying Qualcomm. For investors that do not want to short-sell, you can buy put options on Intel while buying call on Qualcomm, ideally with longer expiration dates due to uncertain timeline of acquisition events.
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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