Source: Jin10 Data
Author: Cai Zijun

$Qualcomm (QCOM.US)$The news of a potential acquisition has sparked hot discussions on Wall Street. $Intel (INTC.US)$ But is such a deal really beneficial for the company and its shareholders?

From an analyst's perspective, the answer is not optimistic.

According to The Wall Street Journal, Qualcomm has only contacted its competitor Intel, but this news has been enough to attract wide attention.

Dave Novosel, senior analyst at bond research firm Gimme Credit, mentioned in a research report on Wednesday that Qualcomm may take on massive debt, possibly even downgrading the debt to junk status.

First, background information. Qualcomm is a company that produces modem chips and supplies a large number of chips to companies like Apple, with a market cap of 186 billion dollars.

Formerly the king of American chip manufacturing, Intel currently has a market cap of $97.5 billion, just over half of Qualcomm's market cap. This year, Intel's stock price plummeted by 54% due to failing to attract key customers, even halting dividend payments.

Therefore, from an investment perspective, Intel is attractive.

However, Qualcomm will face risks in financing. Novosel estimates that, considering a premium of about 14%, the company will have to pay approximately $110 billion to acquire Intel. He stated that this financing is likely to be a combination of equity and debt.

The fewer shares Qualcomm chooses to use, the more advantageous it is for existing investors.

When a company uses equity financing for acquisitions, it issues new shares to pay the shareholders of the target company. This will broaden the investor base but dilute the value of existing shareholders. For example, if existing shareholders own 10% of 1 million shares, if the outstanding shares increase by 0.5 million shares, their ownership will decrease to 6.67%.

Assuming Qualcomm chooses a financing method of 70% debt and 30% equity to minimize investor dilution and avoid excessive debt burden, the company needs to raise approximately $77 billion in debt. Qualcomm's current total short-term and long-term debt is $15.4 billion.

Currently, Qualcomm's debt rating is Moody's A2 and Standard & Poor's A— indicating a low credit risk for investors buying its debt.

But if Qualcomm were to further increase its acquisition of Intel by $77 billion, its leverage would soar to more than 8 times, reaching the level of high yield bonds, as Novosel pointed out.

In simple terms, the post-merger entity – Intel and Qualcomm – may have total debt on their balance sheet far exceeding their forecasted earnings before interest, taxes, depreciation, and amortization (EBITDA) for 2024.

This level of leverage matches junk bonds, which may lead Moody's and Standard & Poor's to downgrade Qualcomm's credit rating to junk status. The consequences are very serious: Qualcomm may face higher borrowing costs in the future, thereby increasing capital costs.

On the other hand, Qualcomm may eventually save costs through the integration with Intel. Qualcomm had a cash of $7.7 billion as of June, which can offset some of the expenses from future trades. These savings and cash may help it avoid a credit rating downgrade.

"Due to the scale and potential of the merged entity, rating agencies may not downgrade the rating to below investment grade," he said.

In summary of the communication with Novosel: if the two companies continue negotiations, investors should consider the actual risks faced by Qualcomm.

Editor/Jeffy