When the Market Fails

Here’s the latest in capitalism:

Qualcomm Inc. rejected Broadcom Ltd.’s unsolicited $105 billion offer, setting up a potentially hostile showdown between two giants of the chip industry over what would be the biggest technology takeover ever….In a statement Monday, Qualcomm’s board said the offer, which Broadcom submitted last week, dramatically undervalues the company and comes with significant regulatory uncertainty.

For the past year, until Broadcom made its offer, Qualcomm’s market cap has been around $80-85 billion. Anybody could come in off the street and buy Qualcomm stock that valued the company at that price. But if someone offers to buy all the Qualcomm stock at that price, suddenly capitalism has gone bonkers and the price signal of the market is off base by 30 or 40 percent.

Company boards routinely reject offers like this, and to the extent that it’s just a negotiating tactic I suppose no harm is done. But all too often it’s sincere. Management doesn’t like the idea of losing their prestigious jobs and the board goes along, so they propagate the fiction that their company is really worth a lot more than the market says it is. If it were put to a vote of stockholders, I wonder how many would agree? If it were me, I’d pocket the immediate gain and then invest it somewhere else. Why wait?

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