Broadcom has made a record-breaking $130bn unsolicited bid for Qualcomm, which would make it the world’s third largest chip supplier after Intel and Samsung. If NXP (for which Qualcomm is bidding) were included in the final mix, total sales would be about $40bn, leapfrogging TSMC.
It is clearly determined to net its prey. Only last week, the company relocated its headquarters from Singapore to the US, presumably to make approval of its deal easier. And it says it is prepared to go hostile if Qualcomm does not succumb to its $70-per-share offer, which would be the biggest acquisition ever seen in the technology industry.
“Broadcom’s proposal is compelling for stockholders and stakeholders in both companies. Our proposal provides Qualcomm stockholders with a substantial and immediate premium in cash for their shares, as well as the opportunity to participate in the upside potential of the combined company,” said Broadcom CEO Hock Tan in a statement.
All the same, it is far from certain that the transaction will go through, especially if Qualcomm, which is currently “assessing” the offer, rejects it. The offer values the US firm at $130bn including $25bn of net debt and the price represents a 28% premium on the stock, comprising $60 in cash and $10 in shares. Broadcom says the offer will stand regardless of whether Qualcomm completes its own $47bn acquisition of NXP, approval of which is likely to drag into next year.
However, despite the huge figure, some investors may believe $70 is too low. Although Qualcomm’s share price rose by 3.5% on the announcement of the bid, to $63.98, it came to rest well below the offer price, indicating a lukewarm investor response.
Broadcom had clearly made its move, after months of speculation, at a time when Qualcomm’s value was declining, but some shareholders may want to take the gamble that the US company can restore its growth, settling the Apple dispute, completing the strategically important purchase of NXP, and then riding the twin waves of 5G (which Qualcomm has a good chance of dominating in product sales) and the IoT (bolstered by NXP).
Jerome Dodson, who holds 8.2m Qualcomm shares in his Parnassus Endeavor Fund, told Bloomberg that $70 a share was “dirt cheap”, and that $90 to $100 is closer to where it should be, given the value of its IPR.
Even if the offer is accepted, there will be all kinds of tricky details to negotiate, including the implications of Qualcomm’s still-unresolved bid for NXP. And the sheer scale of the combined entity will alert competition authorities round the world – especially those in China, which is trying to build up its own semiconductor industry and weaken, not strengthen Qualcomm; and perhaps South Korea, whose Samsung is set to overtake Intel as the world’s largest chipmaker (see separate item).
Broadcom was keen to stress the complementary nature of the two portfolios, and certainly, there is very little overlap in the crucial area of cellular. CFO Thomas Krause said: “We are confident that any regulatory requirements necessary to complete a combination with Qualcomm will be met in a timely manner” because of the limited product clashes. There would also be good synergy with NXP, which some observers believe is the primary reason for Broadcom’s interest.
However, there are a few areas of overlap in major markets, which may require divestments or other reassurances to regulators. The most obvious is in WiFi, where both Broadcom and Qualcomm’s Atheros division are leading players. Some other areas of likely scrutiny include Bluetooth, some other RF categories, and some embedded processors (especially if NXP is involved).
If the deal does become a reality next year, what are the key implications for the two companies, and the wider mobile industry?
The clearest result will be even fewer suppliers of chips to mobile and IoT device makers, network and infrastructure suppliers and operators. The industry has been consolidating rapidly (Cavium and Marvell are another rumored tie-up), resulting in a significant reduction in competition. This has been partly a response to falling prices for many chips which were once considered premium products – such as smartphone SoCs – and the need for economies of scale to withstand such trends, while also investing in next generation processes, fabs and products. However, the mergers should also drive prices up again, or at least stabilize them – depending on how aggressively the Chinese players, themselves another driver of consolidation among established chipmakers, push fees down in order to buy share.
Broadcom’s motivations are clear. The company formerly known as Avago has been on a massive acquisition spree to turn itself into a global gorilla with the scale, and the breadth of portfolio, to play in the semiconductor premier league and address most of the high growth chip markets, from the Internet of Things to the cloud (see diagram). Of course, the first big deal was for Broadcom itself (Avago then adopted that name for the entire group), and recently it added Brocade.
Qualcomm would expand the company’s scale dramatically, and add the all-important element of cellular connectivity, just in time for 5G. In his statement, Tan said: “This complementary transaction will position the combined company as a global communications leader with an impressive portfolio of technologies and products. We would not make this offer if we were not confident that our common global customers would embrace the proposed combination. With greater scale and broader product diversification, the combined company will be positioned to deliver more advanced semiconductor solutions for our global customers and drive enhanced stockholder value.”
Both Avago and the former Broadcom have tried and failed to make a significant impact on the cellular world, despite the latter’s leadership in non-3GPP connectivity, particularly WiFi. Broadcom’s acquisition of Renesas Mobile collapsed almost as soon as it had been finalized and the company backed away from the sector.
But that left a major hole in its dowry when it merged with Avago. Smartphones may have far lower growth rates than they did a decade ago, and far lower than some of the emerging categories, but they remain the largest market for high end modems and mobile processors, and prowess in that area is proving an essential springboard for rapid expansion into other segments, notably anything connected to the wireless IoT.
Of course, if Broadcom succeeds in acquiring Qualcomm and also NXP, its IoT platform would be greatly expanded and enriched, bringing the Dutch company’s leadership position in automotive chips and the strong business in microcontrollers, inherited with its own acquisition of Freescale.
But what about Qualcomm? There will be a sadness attached to the swallowing-up of the company which, more than any other, defined the terms of the smartphone era by providing the core enablers for 3G and 4G devices.
But the temptation for its board and shareholders will be to snap up this offer before the almost inevitable decline in Qualcomm’s value, and secondarily, to ease a settlement of the Apple lawsuits, which are hitting its quarterly results (Broadcom, also an iPhone supplier, has a friendlier relationship with Apple). It would also save the company from having to go to the markets to raise money for the NXP purchase.
Qualcomm’s licensing business – the source of most of its profits as well as the reason its chips stay consistently at the cutting edge – is under huge pressure. Rising Chinese competition and innovation; a smaller (though still significant) IPR position in 5G than the preceding generations; a barrage of attacks on its business model from competition authorities and from other companies (notably Apple) – all these will almost certainly squeeze the firm’s profits and value going forward, and may force it to adopt radical changes in its model, or to spin off the licensing activities altogether.
The reasons why the much-discussed break-up would harm Qualcomm also inform the downsides of a Broadcom takeover. A divided Qualcomm would be far less than the sum of its parts because its differentiation relies on the flow of innovation and R&D from its renowned engineering teams. The huge investment in that R&D is justified because it drives two revenue streams, licensing and advanced chips. The two are interrelated – too closely, argue some of the lawsuits, but certainly in a way that has kept Qualcomm unique and extremely hard to catch in its core markets, especially modems and mobile system-on-chip products. But Qualcomm is no troll – its licensing revenues derive from genuine and expensive innovation.
Broadcom has a very different culture. The original Broadcom gained power by keeping R&D expenses low, by making tactical acquisitions, and with a gift for entering markets at just the right time – to avoid the cost of having to create that market in the early stages, snapping up the revenues just as it hit volume. Culturally, then, will Qualcomm keep its distinctive engineering focus (some would say obsession) in the long term under new ownership? Or will the expense of its R&D be sacrificed for a more classical Broadcom/Avago strategy – to pursue large scale through M&A, skilful timing and powerful distribution?
If the latter approach prevails, we can be sure that the wireless industry as a whole will be the weaker because it will lose a significant force in pushing technology boundaries for the whole sector. While many aspects of wireless are commoditizing, and do not need the same degree of engineering excellence as in the earlier years of the mobile era, there are still areas where scale will not be enough to achieve what operators, enterprises and users need. So we would see others taking up Qualcomm’s innovation mantle, but probably not from among its traditional competitors.
After all, MediaTek, Nvidia, Intel and Broadcom itself have tried that and failed in the past (see separate item). Emerging Chinese players will fill some of the vacuum, but in the semiconductor categories which will require most innovation in the wireless world – mobile machine learning, machine vision, ultra-low latency and others – the breakthroughs may well come from Facebook, Google and Baidu.
Broadcom relocates to the US:
Official US approval of Broadcom’s US$5.9bn acquisition of data center and storage firm Brocade has been delayed because of scrutiny by the Committee on Foreign Investment in the United States (CFIUS), which examines the purchase of US assets by foreign companies in case of national security or intellectual property issues.
The move of headquarters should ease that process for Broadcom (and of course, greatly help to gain approval of a Qualcomm deal).
Also, the firm may hope to take advantage of tax changes. The Republicans in Congress are proposing reforms to US tax laws which, if passed, would lower rates of corporate tax from 35% to 20% and make it easier for companies to deduct taxes paid overseas. Meanwhile, some tax breaks which Avago gained from basing itself in Singapore will start to be phased out from 2021, four years earlier than expected.
Broadcom will now have its official HQ in Delaware and, while no new US jobs are being directly created by the move, it says it will increase its US-based R&D spending.
Hock Tan, Broadcom’s CEO said: “America is once again the best place to lead a business with a global footprint. The proposed tax reform package would level the global playing field and allow us to compete worldwide from here in the United States. Our move would domicile our $20bn annual revenue in the United States. From our base here, each year we will invest $3bn in research and engineering and $6bn in manufacturing.”
Broadcom’s acquisition spree:
Broadcom/Avago has completed five major acquisitions in the past four years:
2013 – Avago buys Emulex
2013 – Broadcom buys Renesas Mobil
2014 – Avago buys LSI
2016 – Avago buys Broadcom and takes its name
2016 – Broadcom makes offer for Brocade