Broadcom has offered about US$105bn (R1.5 trillion) for Qualcomm, kicking off an ambitious attempt at the largest technology takeover ever in a deal that would rock the electronics industry.
Broadcom made an offer of $70/share in cash and stock for Qualcomm, a 28% premium for the world’s largest maker of mobile phone chips as of the stock’s closing price on 2 November, before Bloomberg first reported talks of a deal. The proposed transaction is valued at approximately $130bn on a pro forma basis, including $25bn of net debt.
Buying Qualcomm would make Broadcom the third largest chip maker, behind Intel and Samsung Electronics. The combined business would instantly become the default provider of a set of components needed to build each of the more than a billion smartphones sold every year. The deal would dwarf Dell’s $67bn acquisition of EMC in 2015 — then the biggest in the technology industry.
“This complementary transaction will position the combined company as a global communications leader with an impressive portfolio of technologies and products,” Hock Tan, president and CEO of Broadcom, said in a statement on Monday. “We would not make this offer if we were not confident that our common global customers would embrace the proposed combination.’’
Qualcomm is preparing to fend off the unsolicited offer, arguing it undervalues the company, people familiar with the plans have said. Qualcomm will argue that the proposal is an opportunistic move to buy the chip maker on the cheap, the people said, and it will likely recommend that shareholders reject it. In a statement on Monday, Qualcomm said it would “assess the proposal in order to pursue the course of action that is in the best interests of Qualcomm shareholders”.
The bid values Qualcomm at about 21.2 times earnings before interest, tax, depreciation and amortisation, compared to a median multiple of 22.5 for similar deals in the industry, according to data compiled by Bloomberg.
Rare moment of weakness
Tan is making a play for Qualcomm as the once unstoppable chip maker limps through a rare moment of weakness. Qualcomm’s most profitable unit, which licenses mobile phone technology, is under assault from regulatory actions around the world and a legal challenge from Apple. The lawsuit may prompt Apple to stop buying Qualcomm chips for use in the iPhone and other products, which would deal a major blow to a unit that drives the bulk of Qualcomm’s revenue. Meanwhile, Broadcom counts Apple among its largest customers.
Qualcomm shares rose 3.9% in pre-market trading on Monday in New York. The stock closed up 13% on Friday at $61.84, valuing the company at $91bn. Broadcom rose 5.5% on Friday for a market value of $112bn. Its shares gained 2.4% early on Monday.
“The deal makes a lot of sense,” Romit Shah, an analyst at Instinet, said on Bloomberg Television. “Broadcom would be getting $30bn in revenue, and it would be very strategic. Both companies have a significant presence in smartphones.”
Broadcom’s Tan has played a pivotal role in a wave of consolidation engulfing the $300bn semiconductor industry over the last three years. He took a former Hewlett-Packard division and built it into one of the largest chip makers through a string of purchases. Tan established the current iteration of Broadcom in 2016 when his Singaporean company Avago Technologies acquired US-based Broadcom for $37bn.
Tan, who holds degrees in mechanical engineering from the Massachusetts Institute of Technology and an MBA from Harvard Business School, laid the foundation for future deal making last week. In a widely broadcast announcement on Thursday with US President Donald Trump in the Oval Office, Tan said he will move Broadcom’s headquarters to the US.
The move was largely symbolic: Broadcom already lists San Jose, California as a corporate co-headquarters. But analysts said the domicile change would make it easier for Broadcom to launch deals from the US and complete its $5.9bn takeover of Brocade Communications Systems. 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.
“The decision is rooted in the company’s strategy to pursue M&A and in the political reality that it has become more difficult for overseas-based companies to acquire US ones,” said Mark Lipacis, an analyst at Jefferies & Co.
If Broadcom can pull off a deal, it could help smooth things over with Qualcomm’s biggest adversary. A change of management at Qualcomm might help resolve the dispute with Apple more quickly, according to Sanford C Bernstein & Co analyst Stacy Rasgon.
At issue between the two companies are licensing fees the chip maker charges for patents covering 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 design devices that exclude Qualcomm’s chips, a person familiar with the situation has said.
Qualcomm has countered that Apple, one of its largest customers, has lied to regulators in an unfair attempt to reduce fees it must pay. Qualcomm filed lawsuits seeking to ban the sale and manufacture of iPhones in China, which, if granted, would cut off Apple from the world’s largest phone market and cripple production. Last week, Qualcomm executives said the legal process would “proceed under the court’s schedule”, indicating no resolution soon.
NXP deal
Whatever the outcome of the Apple dispute, San Diego-based Qualcomm must confront challenges with closing its $47bn purchase of NXP Semiconductors. The deal is facing regulatory scrutiny in Europe and opposition from some NXP shareholders, including activist hedge fund Elliott Management, which has argued the offer undervalues NXP.
In the statement on Monday, Broadcom said its offer stands whether Qualcomm’s pending acquisition of NXP is closed under the current terms of $110 per NXP share, or if the transaction is terminated.
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.
Despite both chiefs’ political manoeuvering, a Broadcom-Qualcomm tie-up may face intense regulatory scrutiny. The two companies are independently among the top 10 providers of chips in an industry that’s consolidating rapidly. Together, they would have tight control of the supply chain for Wi-Fi and cellular modem chips, vital components in making phones. — (c) 2017 Bloomberg LP
