Broadcom’s controversial $117bn bid to acquire Qualcomm is hanging by a thread after US authorities ordered a postponement of a critical shareholder meeting.
Qualcomm investors were to have made a crucial vote today (March 6), after weeks of rancorous disputes between the two chip giants. They were to have voted on Broadcom’s nominations for six replacement Qualcomm board members – if successful, the predator would have gained a potential majority on the 11-person board, paving the way for acceptance of its bid.
But that meeting will now be delayed by at least a month, at the order of the powerful Committee on Foreign Investment in the US (CFIUS), which initiated an investigation in to the proposed deal.
With the San Diego company under pressure on many fronts – antitrust probes, the Apple lawsuit and rising competition from China – it was expected that some investors would be favorable to acquisition, despite the risk to Qualcomm’s record of innovation and high R&D spend; and even though the US firm argues that the price is too low.
There were some early signs of support for Broadcom’s board nominees. Qualcomm shareholder T. Rowe Price Group submitted an early vote in favor of all six candidates, according to Bloomberg sources. Nomura analyst Romit Shah told Bloomberg TV: “Time is up for Qualcomm and it’s a question of when. When this vote ultimately comes through I think the holders are going to replace this board.”
The CFIUS order, sparked by a Qualcomm petition, is unusual – the body does not usually embark on a probe until a merger is agreed. This may reflect an administration in which there is heightened sensitivity about competition to US industries, especially in sectors like technology with security implications, and especially from Chinese firms or their associates. Broadcom’s ties to Huawei have already been raised as a concern in some quarters, even though Qualcomm also sells to the Chinese vendor, and is increasingly reliant on customers and joint ventures in the country.
Broadcom itself is currently Singapore-based, after it was acquired by Avago, based in the Asian city state, in 2015 (Avago then took the US firm’s name). However, it is in the process of relocating its headquarters to the US, partly, it is thought, to ease its ability to acquire US firms, and particularly Qualcomm.
Broadcom responded angrily to Qualcomm’s action in “secretly” filing a voluntary request for CFIUS to start a probe, calling a “blatant, desperate act”. Qualcomm retorted that Broadcom’s claims of secrecy had “no basis in fact”, since Broadcom has been talking with CFIUS for weeks and made two written submissions.
According to sources, CFIUS was split on whether to order an immediate review, partly because Broadcom’s relocation is imminent – if it stays on schedule, it will be finalized no later than May 6 this year, at which point it will not be subject to CFIUS review, though it might then be of interest to the domestic antitrust authorities within the Department of Justice. Qualcomm has repeatedly argued that the deal would be likely to fail because of regulatory opposition, and that the process would distract the firms from their core business, potentially for a year or more.
Last month, Broadcom reduced its offer price for Qualcomm to $79 a share. In November, when it first mounted its bid, it offered $70 a share, but then increased that price to $82 a share, which it said was its “best and final offer”, and which was contingent on various factors – one of them being that Qualcomm would complete its own planned acquisition of NXP without raising the price.
The US firm then provocatively increased its offer for NXP, prompting Broadcom to trim its own offer to $79 (it did say it would add $3 in cash back into the deal should the NXP deal fall through).
The two firms have held one set of talks and Qualcomm has said it would be open to further discussions with Broadcom, provided those reflect its “true value”, but it has rejected every offer so far, on the basis of undervaluing the business, and of regulatory risk.