What The Trump Deal Means For Broadcom

In terms of corporate strategy, the deal means very little.

Broadcom Ltd (NASDAQ: AVGO) announced Thursday it would redomicile from Singapore to the U.S. regardless of the fate of proposed corporate tax reforms.

M&A Prospects

The move would better position Broadcom for a Brocade Communications Systems, Inc. (NASDAQ: BRCD) takeover, abating the regulatory concerns of the Committee on Foreign Investment in the United States, or CFIUS. 

“We have increasing confidence this should address any concerns or reservations CFIUS may have related to a foreign entity acquiring a U.S. company in BRCD,” KeyBanc Capital Markets analyst John Vinh said in a Friday note. “We believe this deal remains on track to close by the end of November.”

The move also places Broadcom amid potential semiconductor targets and diminishes the regulatory pains of acquiring U.S. assets.

Tax Implications

President Donald Trump’s proposed tax adjustment, which would lower the standard corporate rate from 35 percent to 20 percent, makes the decision all the more enticing.

Broadcom is expected to incur a corporate tax rate increase from 4.5 percent to between 8 and 15 percent in its redomiciling. A reform would bring Broadcom closer to an 8 percent rate, according to KeyBanc.

For a post-Brocade-merger entity, the difference is $736 million in taxes versus $1.379 billion. Either rate is significantly heavier than what the firm would pay as a Singapore company ― just $497 million.

Broadcom shareholders will see earnings per share diminish from a potential $18.79 to between $16.88 and $18.27, while implied fair value drops from $290 to between $260 and $280.

At the time of publication, Broadcom was set to open at $263.98.

Related Links:
Why Broadcom Will Likely Be A Big Winner From Apple’s iPhone Launch
4 Semiconductor Stocks Fund Managers Are Buying Most