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I bought BRCM yesterday. Had planned to do it all along as I was waiting for my 31 day wash sale period to expire. The NETL deal caused me extra work but I went ahead anyway. Seems like a solid if expensive deal for BRCM. I like how well the stock has acted in the face of the deal and a weak market (at least until the final hour yesterday). This deal is also like to spur takeover interest in NETL peers CAVM and EZCH. If you want to discuss BRCM or the ramifications of this deal beyond BRCM, please head over to our forums where I have started a thread.
Here is my thinking on getting long BRCM:
Yesterday, the company announced the acquisition of Netlogic (NTEL). The price was hefty at over 25 times earnings but NTEL is growing rapidly and dramatically expands BRCM’s total addressable market via entrance into communications network infrastructure. Wireless and wireline broadband is one of the few global growth industries and is a central theme on the long side for Entermedia, my long/short equity hedge fund focused on media, entertianment, communications, and related technologies. Besides BRCM, I am also long Apple (AAPL), Crown Castle (CCI), and Qualcomm (QCOM) as plays on this theme.
Initially, I was cautious about adding BRCM into a big acquisition announcement. BRCM’s market cap is $18 billion and they are paying $3.8 billion cash for NTEL. The deal is accretive but that is not saying much when cash earns 0%. The strategic rationale is sound and with this deal done the risk of a bad acquisition, always present at acquisitive tech companies like BRCM, is off the table. NETL leaves BRCM with a good balance sheet (over $1 billion in cash and no debt) but no real room to make another big deal.
Analysts greeted the deal favorably. The stock held up well in a tough market, continuing a recent pattern of good performance for the shares. The company reported a positive surprise last quarter and used the deal announcement to affirm 3Q guidance. In the end, I decided the downdraft on the deal was a good opportunity to get back in BRCM. I like the product and financial momentum, the strategic direction, the stock valuation, and the stock price action.
To reflect my cautious market view, I bought a full position but wrote call options against half the shares. If I get exercised on the calls, I get a 10% return in 5 weeks and still have half the stock going higher. If no exercise, I get paid a little to wait in a company with excellent growth prospects.
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