Why Analysts Have a Mixed View on the Cavium-QLogic Merger

Cavium Inc. (NASDAQ: CAVM) is buying QLogic Corp. (NASDAQ: QLGC) for $1.4 billion. Cavium’s market capitalization prior to the share drop, often typical of an acquirer, was roughly $2.75 billion.

24/7 Wall St. noticed that Cavium shares were indicated down 14% at $41.20 on Thursday’s early indications. While acquirers often see their stock drop when they announce an acquisition, the reality is that Cavium’s management probably wasn’t expecting such a large drop.

A question comes to mind: do analysts and investors alike hate this merger? The price reaction would indicate that they do. Analyst notes indicate a much more mixed view.

The proposed merger was agreed to by QLogic’s board. What is planned by Cavium is to marry its semiconductor products for intelligent processing for enterprise, data center, cloud, wired and wireless networking with QLogic’s high-performance networking infrastructure solutions. All in all, the reactions have been mixed, even if the downgrades seem to be winning.

Cavium was downgraded to Hold from Buy and the price target was cut to $48 from $61 at Canaccord Genuity. Jefferies also downgraded the stock to Hold from Buy, lowering its target to $45 from $61. Oppenheimer lowered Cavium’s rating to Perform from Outperform, thus removing an upside price target. Pacific Crest downgraded it to Sector Weight from Overweight.

But what about other analysts? There are still quite a few positive ratings intact, with most cutting expectations for how much upside has been seen. Several other calls were seen as follows:

  • Merrill Lynch maintained a Neutral rating, noting that the deal adds defensive accretive earnings while diluting its growth.
  • Brean Capital maintained its Buy rating. While it sees the deal as a positive, it does acknowledge slower growth metrics, and the firm lowered its target to $60 from $67.
  • Morgan Stanley maintained its Overweight rating. Still, it lowered the price target to $55 from $60.
  • Raymond James still has a Strong Buy rating on last look. It lowered its price target to $65 from $75.
  • Wedbush Securities maintained its Outperform rating, but the firm lowered its price target to $51 from $68.