Broadcom reported in $100-bn bid to buy out rival chipmaker Qualcomm
04 November 2017
Broadcom Ltd chief executive officer Hock Tan is contemplating an audacious $100-billion bid for Qualcomm Inc, using what would be the largest technology takeover since AOL's $105-billion Time Warner takeover in 2001 (See: World''s largest media company is born ), to build a powerhouse that dominates the market for wireless chips, says a Bloomberg report citing people familiar with the matter.
An offer of about $70 a share would include cash and stock and is likely to be made in the coming days, said the people, demanding anonymity in discussing a private transaction that could still not come through.
Buying Qualcomm would transform Broadcom into the third-largest chipmaker, behind Intel Corp and Samsung Electronics Co, and make it the leader in chips
used in the more than 1 billion smartphones sold each year.
The combination would dwarf Dell Inc's $67-billion acquisition of EMC (See: Dell to buy EMC for $67-bn in largest tech acquisition ) in 2015 - the biggest in the technology industry in recent years – and, according to Bloomberg, meld Qualcomm's dominance of chips that connect handsets to wireless networks with Broadcom's expertise in chips that link devices to Wi-Fi networks.
But Fortune points out that there are plenty of sceptics. Broadcom hasn't even won approval for a pending $6-billion acquisition of Brocade, initially announced last November. And Qualcomm is in the middle of a year-long effort to buy NXP Semiconductors for $39 billion, while also engaging in a massive, global legal battle with Apple, its best customer.
Qualcomm's shares jumped 13 per cent on Friday to almost $62, valuing the company at $91 billion - still below the rumoured offer price. Broadcom shares gained 5 per cent.
''The deal makes a lot of sense,'' Romit Shah, an analyst at Instinet, said on Bloomberg Television. ''Broadcom would be getting $30 billion in revenue and it would be very strategic. Both companies have a significant presence in smartphones.''
A serial acquirer, Broadcom's Tan has played a pivotal role in a wave of consolidation engulfing the $300 billion semiconductor industry over the last three years.
Broadcom, created in 2016 when Avago Technologies Ltd acquired Broadcom Corp. for $37 billion, has built itself from a former Hewlett Packard division into one of the largest chipmakers via a string of purchases.
A former CEO of Integrated Circuit Systems who has held senior management positions at Commodore International, PepsiCo Inc and General Motors Co, Tan has made it plain that he wants to strike more deals.
Those who bet against the Malaysian-born CEO, trained at MIT and Harvard, often find themselves on the wrong end of the deal when the dust has settled. In an industry filled with brilliant engineers like Nvidia CEO Jensen Huang and Advanced Micro Device's Lisa Su, Tan is the finance geek who can manage balance sheet as a powerfully as he can create a new technology product.
Tan a serial acquirer
And Tan has experience swallowing bigger fish. After building Avago Technologies into a medium-sized chipmaker, his buyout of Broadcom created a world-class titan, the third-largest chipmaker (which retained the Broadcom name), with products for wireless communications, smartphones, data center servers and many more markets. Qualcomm is, of course, even bigger-with $22 billion of annual sales versus Broadcom's $18 billion.
Tan laid the foundation for future deal-making on Thursday. In a widely broadcast announcement alongside US President Donald Trump in the Oval Office, Tan said he will move Broadcom's headquarters to the US from Singapore (See: Broadcom to move legal headquarters back to US).
Broadcom, which counts Apple Inc among its largest customers, already lists San Jose, California, as a corporate co-headquarters.
Analysts said the domicile change would make it easier for Broadcom to launch deals from the US and complete its $5.9-billion takeover of Brocade Communications Systems Inc. Announced last November, that transaction has been delayed at least three times by the Committee on Foreign Investment in the US, a panel that reviews the security risks of foreign acquisitions of American companies.
Qualcomm's legal woes
Qualcomm finds itself in a weakened state. It's embroiled in a legal battle with Apple that has taken a toll on revenue and jeopardized a business model that made Qualcomm one of the most successful chipmakers. Before today, its shares had slumped 16 per cent this year.
Qualcomm, a company founded and run by engineers, could probably use a thorough going over by Hock and his green eyeshade crew, says Fortune. With growth in the global smartphone market slowing, the company has attacked all manner of new markets, developing everything from laptops that can run Windows using chips that don't rely on Intel designs to a whole new breed of central processors for self-driving cars.
Some of Qualcomm's problems with Apple seem to be of its own making since the company cut off rebate payments and stopped providing testing software. And antitrust regulators around the world are putting the squeeze on Qualcomm's high royalty rates that bring in billions in profits from smartphone makers.
At issue between Qualcomm and Apple are licensing fees the chipmaker charges for patents that cover the basics of how mobile phone systems work. Apple contends Qualcomm is unfairly charging too much and illegally taking advantage of its market position in chips. To heighten pressure on Qualcomm, Apple has stopped paying the licensing fees and is planning to designing devices that exclude Qualcomm's chips, according to a person familiar with the situation.
Qualcomm has countered that Apple, one of its largest customers, has lied to regulators in an unfair attempt to bully its opponent into charging less. It has filed lawsuits seeking to ban the sale and manufacture of iPhones in China, the world's largest phone market (Qualcomm files suits in China to stop production, sales of iPhone). http://www.domain-b.com/companies/companies_q/qualcomm/20171014_production.html
A change of management at Qualcomm might help resolve the dispute with Apple more quickly, and thereby make Qualcomm's licensing and chip businesses more valuable, according to analysts.
Whatever the outcome of the Apple dispute, San Diego-based Qualcomm is also confronting headwinds in closing its $47-billion purchase of NXP Semiconductors NV. The deal is facing regulatory scrutiny in Europe and (EU regulators to probe Qualcomm's $38 billion bid for NXP Semiconductors) opposition from some shareholders including activist hedge fund firm Elliott Management Corp. which has argued the offer undervalues NXP. http://www.domain-b.com/companies/companies_q/qualcomm/20170610_launched.html
Like Tan, Qualcomm CEO Steve Mollenkopf is spending time with the Trump administration. Mollenkopf is taking part in the President's trade mission to China later this month, according to a company spokeswoman.
Aside from the financial challenges of such a large deal, Broadcom may also encounter close regulatory scrutiny as it would gain control of a big part of the supply chain of vital phone components such as Wi-Fi and cellular modem chips. The two companies are already among the top 10 providers of chips in an industry that's consolidating rapidly.