Broadcom City

Quote of the Day

Appetizer, not the main course.”

Market Snapshot

• The Dow finished lower after Walmart’s stock posted its worst day since 1988.
• U.S. yields continued to rise—the 2-year yield reached 2008 highs.
• Bitcoin inched closer to $12,000.
• Adding more cash to its balance sheet, the U.S. Treasury sold off $179 billion in securities.

Qualcomm Raised Its Offer to NXP, Broadcom Will Fight Back

Broadcom (+0.29%) and Qualcomm’s (-1.33%) Valentine’s Day date ended in tears as Qualcomm walked away from yet another tender buyout offer. And Qualcomm is wasting no time rebounding, raising its offer to $44 billion for NXP (+5.96%)—a separate, automobile-focused semiconductor developer.

Fortunately the gamble paid off, helping Qualcomm win favor with NXP’s biggest (and initially hesitant) stakeholders. But it’s not in the clear yet. For the deal to go through, it’ll need regulatory approval from China’s Ministry of Commerce AND Qualcomm will need to fend off continuing attacks from Broadcom, which seemingly can’t take a hint.

Need proof?

How about Broadcom’s timely response to Qualcomm’s new offer to NXP:

“This revised price for NXP is well beyond what Qualcomm has repeatedly characterized as a ‘full and fair’ price. We believe any responsible board would have seriously engaged with Broadcom regarding Broadcom’s value-maximizing offer.”

Loose translation: Broadcom’s interest in Qualcomm was contingent on the NXP deal going through at its original value—now, it’s “evaluating its options.”

More likely translation: Broadcom is head over heels for Qualcomm, raising its initial proposal from $105 billion to $121 billion, but getting rejected twice. The deal would have been (and still could be) the largest tech takeover ever.

Not wanting to pump up its offer, Broadcom is using some PR firepower to turn Qualcomm shareholders against the company.

Why would it do that?

Fast forward: …to March 6, when Qualcomm shareholders will vote on its board, including a new slate of directors proposed by Broadcom. It’ll be tech’s biggest game of high stakes poker this year.

If Qualcomm wins, the NXP deal will likely get the green light. But if Broadcom gets its way? It could mean the end of Qualcomm-NXP and an inevitable Broadcom takeover. We’ll bring the popcorn.

Walmart’s E-Commerce Growth Hits Speed Bump

It turns out the key to e-commerce growth isn’t unlike growing plants: you need a lot of light. And with Walmart stuck squarely in Amazon’s shadow, it’s no wonder the retail giant’s online growth slowed to 23% last quarter. A substantial drop from the 50% growth it hit the quarter prior.

Walmart acknowledged, but didn’t specify, the hiccups that took their toll on sales as it went head-to-head with Amazon during retail’s busiest time of the year: Morning Brew’s birthday the holiday season. But operational culprits include the cost to acquire Bonobos, Modcloth, and especially Jet.com in the perpetual game of catch-up with Amazon’s 44% market share and innovation. They don’t call it Walmart Go.

Running the numbers: Walmart shares fell ~9% on the news that Q4 earnings missed expectations (their worst day in thirty years). The company posted ~$11.5 billion in U.S. e-commerce revenue for the year, but its overall profit of $2.18 billion is down from last year’s $3.76 billion.

Are the costs of e-competing worth the payoff? TBD.

Electric Cars Won’t Completely Kill Oil

Obvious sentence of the day: driverless electric cars will revolutionize transportation in the future. Less obvious: within the next 20 years, global oil demand will peak.

That is, according to BP’s forecast in its 2018 Energy Outlook. The oil and gas giant outlines multiple scenarios based on a few expectations:

* Autonomous vehicles will be available in the early 2020s
* There will be a 100x increase from 3 million to over 320 million oil-less (mostly self-driving) cars by 2040
* Electric vehicles (EVs) will comprise ~15% of a total 2 billion cars

However, despite the rapid growth in EVs, BP doesn’t anticipate a collapse in oil demand. In fact, the UK crude producer projects (in one scenario) that car oil consumption in 2040 will mirror 2016’s 18.7 million barrels a day.

Just how resilient is oil demand? Even a ban on fossil fuel-powered cars in 2040 wouldn’t erase it. There are still the reliable users in trucking and petrochemical production, e.g. plastics.

Albertsons Supermarket Checks Out With Rite Aid in Its Basket

To be a successful grocery chain in 2018, you’ve got to excel in a variety of areas: e-commerce, delivery, and…pharmacy?

That’s the game plan for supermarket operator Albertsons, which is acquiring Rite Aid (+3.29%)…well, the remainder Walgreens isn’t already buying. The merger will create a company with a $24 billion market value (including debt) and revenues of $83 billion.

Here’s the thinking behind the deal:

* It’s an opportunity for Albertsons’ PE owner Cerberus to finally release its bird into the wild of the public markets (after 12 long years). Albertsons had planned on IPOing in 2015, but quickly nixed the idea when Walmart’s disappointing forecast put a damper on retail stocks.
* Albertsons can leverage Rite Aid’s pharmacy customers—which spend 3x more on groceries than the average—while Rite Aid is feeling the pressure to scale like its rivals Walgreens (eyeing AmerisourceBergen) and CVS (acquiring Aetna).
* You-know-who has arrived in grocery and is on its way to pharma. Hint: it’s Amazon.

What Else Is Happening…

• Jeff Kirwan, Gap (-4.99%) clothing brand’s president and CEO, is stepping down due to disappointing profit growth.
• Introducing Fox Nation, an OTT streaming service from Fox News set to debut in Q4.
• A federal judge rejected AT&T’s (-1.00%) request to view White House communications with the DOJ on the Time Warner deal.
• President Trump directed the DOJ to ban “bump stocks” on semi-automatic rifles.

Economic Calendar

• Monday     Earnings: No Events

                    Economic Events: No Events

• Tuesday    Earnings: Domino’s (+/-), Home Depot (+), HSBC Holdings (-)

                  Economic Events: No Events

• Wednesday    Earnings: Pandora, Roku

                        Economic Events: PMI, Existing Home Sales

• Thursday   Earnings: Barclays, HPE, HP, Intuit, Wayfair

                   Economic Events: Jobless Claims

• Friday       Earnings: No Events

                 Economic Events: No Events

From the Crew: Can the Financial Industry Help Curb Gun Deaths?

Last week was tragic.

We all were deeply saddened by the school shooting in Parkland, FL, and frustrated by continued inaction from the government to fix the epidemic of gun violence in this country.

Spending all our time reading and thinking about the business world, we wondered what role private industry could play in curbing firearm fatalities.

Then we came across an interesting column from NYT writer Andrew Sorkin. He proposes that the financial sector (credit card companies and banks like JPMorgan and Wells Fargo) use its leverage to cut off business to retailers that sell assault rifles and high-capacity magazines. Sorkin also writes that he spent the weekend talking to finance executives, who apparently all “applauded the idea and some said they had already been thinking about it.”

Of course, this could be viewed as an egregious overreach by financial firms into a perfectly legal industry, and could push it into a fully cash (and therefore untraceable) enterprise. Plus, when did banks become our moral compass?

Let’s talk: Does Sorkin’s idea have legs? Do you think financial institutions could (or should) take the lead on this issue? Reply and let us know what you think.

The Breakroom

Question of the Day

Here’s a viral Facebook riddle from a few years ago. It has two possible solutions (one more obvious, the other less so). Can you figure out both?

1 + 4 = 5
2 + 5 = 12
3 + 6 = 21
8 + 11 = ?

(Answer located at the bottom of newsletter)

Profitable Trivia

Some industries have a much higher profit margin than others. Last year, financial data firm Sageworks compiled a list of the most profitable industries.

Can you name two industries out of the top 5?

(Answer located at the bottom of newsletter)

Stat of the Day

15%—Decline in viewership for NBC’s Sunday primetime Olympic coverage compared to the same day four years ago. But there’s some good news: digital viewership is through the roof, jumping 174% from Sochi 2014.

Breakroom Answers

Question of the Day: 40 and 96 (Explannation)

Business Trivia: Accounting, tax preparation, bookkeeping, and payroll services (18.3%), lessors of real estate (17.9%), legal services (17.4%), management of companies or enterprises (16.0%), activities related to real estate (14.9%)