President Trump has blocked Broadcom’s proposed buyout of Qualcomm. The combination of the two chipmakers would have potentially been the biggest tech merger ever.
After getting delayed by at least a month or so following a regulatory investigation just days before the meeting was scheduled to take place, Qualcomm’s timetable to hold the meeting is now bumped up to ten days from now — and possibly before Broadcom may complete its move to the U.S.
The new change is coming as part of a presidential order by the Trump administration to block a takeover attempt by Broadcom, which is looking to acquire the company in a hostile maneuver worth over $100 billion — making it the largest tech deal of all time. Qualcomm planned to hold the meeting last week, but had to push it back pending an investigation by the Committee on Foreign Investment in the United States (or CFIUS).
Qualcomm also said in a statement that the order disqualified the nominees from Broadcom for the shareholder meeting, which would have given it the capacity to acquire Qualcomm in a hostile takeover. Broadcom said it planned to move its headquarters to the U.S., and Bloomberg reported that the company said it would have completed its move by April 3 — again, days before the shareholder meeting was to originally take place.
The sum of all these moves — strategic or otherwise — is that, for now, it looks like Qualcomm isn’t going to even give Broadcom a shot at getting the directors on board that could help it complete its hostile takeover. It’s also a setback for Broadcom CEO Hock Tan, known as an aggressive dealmaker that’s looking to lock up the industry in the face of companies like Intel looking to make their moves into the 5G space.
Here’s the full statement from Qualcomm:
Qualcomm Incorporated (NASDAQ: QCOM) today received a Presidential Order to immediately and permanently abandon the proposed takeover of Qualcomm by Broadcom Limited (NASDAQ: AVGO). Under the terms of the Presidential Order, all of Broadcom’s director nominees are also disqualified from standing for election as directors of Qualcomm.
Qualcomm was also ordered to reconvene its 2018 Annual Meeting of Stockholders on the earliest possible date, which based on the required 10-day notice period, is March 23, 2018. Stockholders of record on January 8, 2018 will be entitled to vote at the meeting.
In short, the drama continues.
Here is the full statement from the White House about the blocked Broadcom-Qualcomm merger:
Upon review of a recommendation from the Committee on Foreign Investment in the United States and consideration, as appropriate, of the factors set forth in the Defense Production Act of 1950, as amended, the President has made relevant findings and issued the following Order:
REGARDING THE PROPOSED TAKEOVER OF QUALCOMM INCORPORATED BY BROADCOM LIMITED
By the authority vested in me as President by the Constitution and the laws of the United States of America, including section 721 of the Defense Production Act of 1950, as amended (section 721), 50 U.S.C. 4565, it is hereby ordered as follows:
Section 1. Findings. (a) There is credible evidence that leads me to believe that Broadcom Limited, a limited company organized under the laws of Singapore (Broadcom), along with its partners, subsidiaries, or affiliates, including Broadcom Corporation, a California corporation, and Broadcom Cayman L.P., a Cayman Islands limited partnership, and their partners, subsidiaries, or affiliates (together, the Purchaser), through exercising control of Qualcomm Incorporated (Qualcomm), a Delaware corporation, might take action that threatens to impair the national security of the United States; and
(b) Provisions of law, other than section 721 and the International Emergency Economic Powers Act (50 U.S.C. 1701 et seq.), do not, in my judgment, provide adequate and appropriate authority for me to protect the national security in this matter.
Sec. 2. Actions Ordered and Authorized. On the basis of the findings set forth in section 1 of this order, considering the factors described in subsection 721(f) of the Defense Production Act of 1950, as appropriate, and pursuant to my authority under applicable law, including section 721, I hereby order that:
(a) The proposed takeover of Qualcomm by the Purchaser is prohibited, and any substantially equivalent merger, acquisition, or takeover, whether effected directly or indirectly, is also prohibited.
(b) All 15 individuals listed as potential candidates on the Form of Blue Proxy Card filed by Broadcom and Broadcom Corporation with the Securities and Exchange Commission on February 20, 2018 (together, the Candidates), are hereby disqualified from standing for election as directors of Qualcomm. Qualcomm is prohibited from accepting the nomination of or votes for any of the Candidates.
(c) The Purchaser shall uphold its proxy commitments to those Qualcomm stockholders who have returned their final proxies to the Purchaser, to the extent consistent with this order.
(d) Qualcomm shall hold its annual stockholder meeting no later than 10 days following the written notice of the meeting provided to stockholders under Delaware General Corporation Law, Title 8, Chapter 1, Subchapter VII, section 222(b), and that notice shall be provided as soon as possible.
(e) The Purchaser and Qualcomm shall immediately and permanently abandon the proposed takeover. Immediately upon completion of all steps necessary to terminate the proposed takeover of Qualcomm, the Purchaser and Qualcomm shall certify in writing to the Committee on Foreign Investment in the United States (CFIUS) that such termination has been effected in accordance with this order and that all steps necessary to fully and permanently abandon the proposed takeover of Qualcomm have been completed.
(f) From the date of this order until the Purchaser and Qualcomm provide a certification of termination of the proposed takeover to CFIUS pursuant to subsection (e) of this section, the Purchaser and Qualcomm shall certify to CFIUS on a weekly basis that they are in compliance with this order and include a description of efforts to fully and permanently abandon the proposed takeover of Qualcomm and a timeline for projected completion of remaining actions.
(g) Any transaction or other device entered into or employed for the purpose of, or with the effect of, avoiding or circumventing this order is prohibited.
(h) If any provision of this order, or the application of any provision to any person or circumstances, is held to be invalid, the remainder of this order and the application of its other provisions to any other persons or circumstances shall not be affected thereby. If any provision of this order, or the application of any provision to any person or circumstances, is held to be invalid because of the lack of certain procedural requirements, the relevant executive branch officials shall implement those procedural requirements.
(i) This order supersedes the Interim Order issued by CFIUS on March 4, 2018.
(j) The Attorney General is authorized to take any steps necessary to enforce this order.
Sec. 3. Reservation. I hereby reserve my authority to issue further orders with respect to the Purchaser and Qualcomm as shall in my judgment be necessary to protect the national security of the United States.
Sec. 4. Publication and Transmittal. (a) This order shall be published in the Federal Register.
(b) I hereby direct the Secretary of the Treasury to transmit a copy of this order to Qualcomm and Broadcom.
DONALD J. TRUMP
THE WHITE HOUSE,
March 12, 2018.
This weekend, I published a comprehensive overview of the epic hundred-billion-dollar Qualcomm versus Broadcom merger battle that has taken place over the past few weeks. In that post, I concluded that “… the Trump administration is going to attempt to maintain jurisdiction over the merger regardless of Broadcom’s redomicile process [back to the US], and will likely end up negative on the deal although it may not outright block it.”
Not only did the Trump administration move faster than expected to make a decision on the merger through CFIUS — the Committee on Foreign Investment in the United States (TechCrunch’s overview of the committee here) — but it decided to unilaterally block the transaction from taking place. While not unprecedented in the history of CFIUS, this is an incredible decision on a U.S. tech merger, and has massive ramifications for tech company valuations and strategy going forward.
While there are many issues at stake in the merger, the one that drove interest in Washington has been Qualcomm’s leadership role in 5G, a technology that the Trump administration considers to be a national security priority. Only two companies in the world have the technological prowess today in this emerging standard: U.S.-based Qualcomm and China-based Huawei.
The Pentagon and national security beltway types have been deeply concerned about Huawei technology encroaching on U.S. telecom infrastructure, even going so far as to block the introduction of Huawei’s new mobile phone from being introduced on AT&T’s network.
Broadcom is Singapore-domiciled, but has the majority of its workers and office space in North America. However, it has a reputation — whether earned or not — of playing a classic private equity game of massively cutting R&D to boost short-term profits. Washington’s concern has been that a Broadcom takeover of Qualcomm would mean that America’s only player in the 5G race would be eliminated through budget cutting, leaving China to monopolize a key technology standard for a generation.
There are a lot of unique properties here: the size of the transaction, the complicated background of Qualcomm and Broadcom, the recent timing of Trump’s tariffs and other protectionist measures and the focus on telecom, which has traditionally been very sensitive in DC security circles.
That said, it is now clear that the Trump administration intends to empower CFIUS to review more technology deals, particularly when companies are potentially transacting with China and other declared strategic competitors. If such a pattern continues, we can expect to see potential declines in valuations for technology companies, which will no longer have deep-pocketed Chinese buyers as potential acquirers.
That’s not all, though. A reform measure currently in Congress would extend CFIUS’ authority to potentially include minority investments as well — such as rounds of venture capital. While that bill is not yet firmed up, it could massively chill Chinese venture investment in Silicon Valley, which has been robust and expanding over the past few years.
It’s important to note that whatever the rhetoric, this was not about jobs or the economy directly. Qualcomm was expected to stay in the United States along with most of its workers, and Broadcom has already announced its decision to redomicile back to the United States following the passage of the tax cuts at the end of 2017.
This is about security, and which country is going to hold power in the 21st century. The Trump administration has declared that its foreign policy will be “America First,” and this decision lives up to that slogan.
China is the second largest economic market in the world, and almost certainly the second most important technology market after the United States. A disruption in the flow of talent and capital between these markets — as we witnessed today — will force company CEOs to resist foreign capital and potentially accept lower valuations as a result. It will also limit the strategic opportunities for global expansion, requiring companies to adapt their strategies not just in China, but elsewhere in the world. In short, today’s decision is the pen stroke heard around the world.
President Trump has blocked Broadcom’s proposed $117 billion buyout of Qualcomm over security concerns, according to a White House statement. News of the president’s decision was first reported by CNBC.
The move could send shockwaves rippling through the broader global economy, as the president continues his push to “put America first” in trade negotiations with global partners.
Broadcom’s acquisition offer, which was a risky prospect heading into today’s decision from the White House, isn’t the first time that the president has blocked a deal. But the proposed deal between the two chipmakers had broad implications for the entire technology industry and the ramifications of the president’s decision will be enormous.
The combination of the two chipmakers would have potentially been the biggest tech merger of all time, and would have brought together two of the biggest companies that manufacture the processors that power phones, computers and almost the entire array of connected devices.
It’s a saga that had played out for months amid resistance from Qualcomm — and more recently the US government, whose Committee on Foreign Investment in the United States (CFIUS) last week said it would be investigating the deal on the grounds of national security.
In an unprecedented move, Qualcomm actually approached CFIUS to quash the Broadcom bid — as TechCrunch reported over the weekend.
“Originally… analysts thought that CFIUS was responding to pressure from Congress to act unilaterally on the proposed deal. What we have learned though is that Qualcomm’s board had secretly asked CFIUS to review the transaction on January 29th this year.
In other words, Qualcomm is using America’s regulatory authority as a potential weapon to thwart Broadcom’s bid and protect itself. It’s a brilliant maneuver, and also fairly unprecedented: CFIUS is usually only engaged once both parties to a transaction have finalized a deal and submitted it for review.”
Despite the decision by President Trump to act as a white knight from the White House and save Qualcomm from Broadcom’s clutches, the company still faces some daunting challenges.
It’s still facing a looming lawsuit from Apple over allegedly unfair business practices and it has yet to fully digest its acquisition of NXP.
It was amid these woes that the company was forced to restructure its board. Last week the company said that Dr. Paul E. Jacobs will no longer serve as executive chairman for the company’s board of directors.
While he will remain a director, the move was a sign from Qualcomm’s board that it recognized all was not well at the venerable chipmaker.
The NXP acquisition was actually central to Qualcomm’s argument that it is undervalued. At one point the company wrote an open letter to Broadcom, stating that “your proposal ascribes no value to our accretive NXP acquisition, no value for the expected resolution of our current licensing disputes and no value for the significant opportunity in 5G. Your proposal is inferior relative to our prospects as an independent company and is significantly below both trading and transaction multiples in our sector.”
In other words, it doesn’t think Broadcom is appreciating the value gathered from Qualcomm’s recent acquisition of NXP Semiconductor. It also believes that Broadcom is underestimating Qualcomm’s potential 5G wireless technology.
The 5G factor was critical to the president’s decision to block the bid.
A letter from the Treasury Department, released last week, actually laid out the case for the president’s rejection. In it, CFIUS said that Broadcom’s history of slashing research spending and its ability to compromise Qulacomm’s assets through relationships with foreign governments was concerning.
There’s a race on for global influence over the newest 5G connectivity technology — which holds out the promise of super fast connectivity to enable the autonomous, automated future of driving and manufacturing that tech executives salivate over. It’s one reason why Google and Microsoft were vocal in their opposition to the Broadcom acquisition.
Game of Thrones may be out of season, but the complex and multi-dimensional strategic drama at the heart of the acclaimed series can still be witnessed in today’s ongoing showdown between Broadcom and Qualcomm. This week, we even had a character “death” of one of the “royals” to boot.
For those who have not been paying attention to this epic match, Singapore-domiciled Broadcom has been running a proxy battle with U.S.-based Qualcomm for the past few months, a process that Qualcomm has put enormous efforts into resisting. The two companies are among the most important producers of semiconductors and mobile chipsets, and their combined market value would be in the hundreds of billions of dollars.
Mega-mergers happen occasionally, and hostile takeovers are also not rare. What makes Qualcomm vs. Broadcom unique though is the incredible amount of chess playing that is taking place not only by the two companies, but other companies and governments as well in a simultaneous strategic game for tech domination. Today, I want to highlight a series of those moves from this week, and what those moves portend going forward.
Intel’s nuclear option
Intel is the second largest chipmaker in the world, having recently fallen behind Samsung as Jon Russell noted this January. Intel dominates the chipsets for personal computers, but it has struggled mightily to build an inventory of products targeting smartphones.
That gap has allowed companies like Qualcomm to dominate the market for smartphone chipsets, with recent reports indicating that the company receives 42% of all revenue from the market, with Apple trailing at 20% of the market and MediaTek with 14%. Intel has been barely a blip, which is why it announced just before Mobile World Congress a few weeks ago that it was going to invest heavily in 5G wireless technology going forward.
Today, Qualcomm and Huawei are the technology leaders in the emerging 5G market. While Intel has not executed well in wireless chips in the past, there is a plausible path forward for the company to compete with these two leaders and potentially earn itself a profitable spot at the top of the market.
However, Broadcom’s potential takeover of Qualcomm could vastly complicate such efforts. Broadcom and Qualcomm’s combined market cap could be ahead of Intel’s $244 billion valuation, and if Broadcom were to sell off 5G assets to Huawei (a major point of contention here that is definitely not final), then Intel might have to compete with a deeply-resourced Huawei, a battle it would likely not win.
Intel is gearing up to launch what might be dubbed the nuclear option: a complete buyout of Broadcom. The Wall Street Journal reported on rumors Friday that Intel would take such a move, which would massively dwarf the company’s previous largest acquisition of Altera for $16.7 billion. As the WSJ wrote, “Intel is watching the takeover battle closely and is eager for Broadcom to fail [at acquiring Qualcomm] as the combined company would pose a serious competitive threat, the people said.”
So now we have Intel expending all energy to block Broadcom’s bid for Qualcomm, and also Intel considering a pre-emptive, $109 billion (at minimum!) price for Broadcom to prevent the tie-up if it absolutely had to. That’s some very expensive chess moves right there for all of the companies involved.
Singapore, China and the United States enter the fight
Okay, so a company starts to get involved in an M&A process to prevent their competitors from merging and transforming into a more formidable opponent. That’s pretty standard fare, but where the multi-dimensionality of this acquisition war starts to really become visible is the extent to which national governments are intervening to control the outcome.
The United States is doing the most here, through a government committee known as CFIUS, or the Committee on Foreign Investment in the United States (for those who missed my primer on CFIUS last week, definitely take a read). CFIUS is designed to protect U.S. national security by regulating foreign acquisitions of American companies, and therefore has taken a keen interest in the Broadcom vs. Qualcomm struggle.
In an extraordinarily rare public letter (the committee’s thinking is almost always secret), CFIUS published its preliminary negative outlook on the hostile takeover. Quoting a key paragraph at length:
“Reduction in Qualcomm’s long-term technological competitiveness and influence in standard setting would significantly impact U.S. national security. This is in large part because a weakening of Qualcomm’s position would leave an opening for China to expand its influence on the 5G standard-setting process. Chinese companies, including Huawei, have increased their engagement in 5G standardization working groups as part of their efforts to build out a 5G technology. For example, Huawei has increased its R&D expenditures and owns about 10 percent of 5G essential patents. While the United States remains dominant in the standards-setting space currently, China would likely compete robustly to fill any void left by Qualcomm as a result of this hostile takeover. Given well-known U.S. national security concerns about Huawei and other Chinese telecommunications companies, a shift to Chinese dominance in 5G would have substantial negative national security consequences for the United States.”
Broadcom has been trying to replace most of Qualcomm’s board of directors, with a shareholder vote scheduled for this past week on March 6th. CFIUS asked that the vote be postponed 30 days in order for it to have more time to comprehensively evaluate the national security implications of the proposed transaction.
Originally, I and other analysts thought that CFIUS was responding to pressure from Congress to act unilaterally on the proposed deal. What we have learned though is that Qualcomm’s board had secretly asked CFIUS to review the transaction on January 29th this year.
In other words, Qualcomm is using America’s regulatory authority as a potential weapon to thwart Broadcom’s bid and protect itself. It’s a brilliant maneuver, and also fairly unprecedented: CFIUS is usually only engaged once both parties to a transaction have finalized a deal and submitted it for review.
China has its own regulatory weapon to fight back though. While dealing with the proxy battle with Broadcom, Qualcomm has also been trying to finalize its acquisition of NXP Semiconductors, which has been going on for a year now. It raised its offer price two weeks ago to $44 billion, an offer that looks like it is increasingly acceptable to NXP shareholders.
There’s just one hang up: China’s chief regulatory body overseeing the transaction, the Ministry of Commerce or MOFCOM, has yet to approve the deal, and it is the only international trade regulator that hasn’t assented. Some M&A analysts are now saying that the approval process could be extended, not just as a response to CFIUS-related concerns, but also due to Trump’s newly proposed steel and aluminum tariffs.
As I mentioned before, China-based Huawei and Qualcomm are the two market leaders for 5G. Harming Qualcomm then would fundamentally benefit Chinese interest, which is why China is also playing the economic security chess game.
Finally, we get to the Singapore connection. Despite having a majority of its employees and office space in North America according to an NYT Dealbook analysis, Broadcom is domiciled in Singapore, which makes it a foreign company in the eyes of CFIUS. Broadcom has floated a proposal to redomicile to the United States, which would potentially make it exempt from CFIUS (though there is serious debate on this point). CFIUS is clearly worried about losing jurisdiction, because it demanded Broadcom give the committee five business days notice before taking action on redomiciling.
Broadcom is taking action though, since it announced yesterday that it would ask shareholders to approve of a redomicile plan on March 23rd, and it disclosed that it had already discussed the plan with the Singapore courts at a hearing on March 9, which would have to approve the plan. So Singapore also has some regulatory leverage in the game as well, which is all the more complicated since it sits between China and the U.S. on many of the national security issues at the heart of this battle.
The demise of a “royal” and the future
If your head isn’t spinning at all of these dynamics, add in one more: Qualcomm is struggling to overcome a malaise that has hit its share price over the past several years. Qualcomm’s board can’t just ignore Broadcom’s offer, given that the premium being offered today is roughly 50% above its share price from before the proxy battle started.
The Qualcomm board announced this week that executive chairman Paul Jacobs, the former CEO of the company and the son of company founder Irwin Jacobs, would step down and the role eliminated. Jeffrey Henderson, a board director appointed by activist hedge fund Jana Partners, will become chairman of the board. The proxy battle has hit at the heart of the founding family of the company, and is clearly starting to take a more personal toll.
In a battle with so many actors and interests at stake, it is hard to prognosticate on what the outcome here is going to be. My analysis is that the Trump administration is going to attempt to maintain jurisdiction over the merger regardless of Broadcom’s redomicile process, and will likely end up negative on the deal although it may not outright block it. Qualcomm also seems increasingly warm to offers from Broadcom to buy the company, and Qualcomm’s desire to consummate a deal would certainly move the process more quickly forward.
Expect more hijinks and chess moves in the coming weeks as the final stages of this fight reach their crescendo. The season finale of this battle is still far away.
The largest tech acquisition offer in history wasn’t enough.
Qualcomm’s board of directors issued a statement on Thursday saying that they are turning down Broadcom’s $121 billion bid to buy the competing chipmaker.
According to the release, Qualcomm “unanimously rejected” an “unsolicited proposal” to buy all of its shares at $82 each, of which $60 would be cash and $22 stock. Broadcom made the revised offer on Monday, up from the previously proposed deal price of $70 per share.
Qualcomm says that it is still undervalued at $121 billion. The board wrote a letter to Broadcom, stating it is worth more, specifically because “your proposal ascribes no value to our accretive NXP acquisition, no value for the expected resolution of our current licensing disputes and no value for the significant opportunity in 5G. Your proposal is inferior relative to our prospects as an independent company and is significantly below both trading and transaction multiples in our sector.”
In other words, Qualcomm thinks it can eventually be worth more on the stock market than $121 billion. Boards of public companies have a fiduciary duty to consider shareholders, so Qualcomm needed to justify why it was turning this down.
This is partly because it doesn’t think Broadcom is appreciating the value gathered from Qualcomm’s recent acquisition of NXP Semiconductor. It also believes that Broadcom is underestimating Qualcomm’s ability to excel at making 5G wireless technology, which it hopes will be instrumental to IoT, short for “Internet of Things.” This could help connect internet in cars, homes and wearable devices.
It presently has a market cap of $92 billion, despite months of deal talks. This implies that the stock market doesn’t think it will end up selling for its desired price in the near future.
Qualcomm shareholders will be voting on March 6th whether to replace its board with Broadcom’s nominees.
Even if Qualcomm were to approve the deal, it’s also not clear if it will actually go through. Regulators may decide that it would have too much power over the smartphone chip market.
Qualcomm already works on both Apple and Samsung phones. It also works with a handful of Chinese competitors. This was the basis for a recent lawsuit.
Qualcomm’s shares recently fell on reports that Apple could start working with Intel instead. Intel’s stock has not traded up this week, however.
The EU recently fined Qualcomm $1.2 billion because of an exclusivity deal with Apple that it felt was unfair.
Last month Qualcomm rejected a $70 per share acquisition offer from Broadcom — but the rival chipmaker isn’t stepping away. Today it’s announced it’s nominated a slate of eleven directors for Qualcomm’s board.
The move puts pressure on Qualcomm’s board to engage with Broadcom’s approach by paving the way for its own shareholders to vote for a takeover which the board already rebuffed.
Qualcomm is due to hold an annual meeting of stockholders on March 6, 2018.
Broadcom says its earlier acquisition offer represents a 28% premium over the closing price of Qualcomm’s common stock on November 2, 2017, aka the last unaffected trading day prior to media speculation regarding a potential transaction; and a premium of 33% to Qualcomm’s unaffected 30-day volume-weighted average price.
But Qualcomm’s board continue to argue the offer “dramatically” undervalues the company.
In a statement confirming receipt of a slate of candidates from Broadcom today, Qualcomm also played up regulatory uncertainty around the transaction, and urged shareholders to support the existing board of “world-class directors” — emphasizing that nine are independent and four have been added in the last three years.
It further described the move as “a blatant attempt to seize control of the Qualcomm Board in order to advance Broadcom’s acquisition agenda” — arguing that the nominees are “inherently conflicted given Broadcom’s desire to acquire Qualcomm in a manner that dramatically undervalues Qualcomm to Broadcom’s benefit”.
“No company in the industry is better positioned than Qualcomm in mobile, IoT, automotive, edge computing and networking and to lead the transition to 5G,” said Tom Horton, Qualcomm’s presiding director, in a statement. “Qualcomm stockholders expect a Board that will support this innovation while evaluating objectively the full range of opportunities available to maximize value for all Qualcomm stockholders.”
In its own statement, Broadcom’s Hock Tan, president and CEO, said the company’s “strong preference” is to engage in what he described as “a constructive dialogue with Qualcomm”. But he also reiterated that the rival has entirely rebuffed its approach thus far.
“We have repeatedly attempted to engage with Qualcomm, and despite stockholder and customer support for the transaction, Qualcomm has ignored those opportunities. The nominations give Qualcomm stockholders an opportunity to voice their disappointment with Qualcomm’s directors and their refusal to engage in discussions with us,” he said.
“In light of the significant value our proposal provides for Qualcomm stockholders, we believe Qualcomm stockholders would be better served by new independent, highly qualified nominees who are committed to maximizing value and acting in the best interests of Qualcomm stockholders.”
The full list of Broadcom’s nominees can be found here.
If the nominees are elected, Broadcom added that it would support a decision by them to increase the size of the Qualcomm Board and reappoint Mark D. McLaughlin, Anthony J. “Tony” Vinciquerra and Jeffrey W. Henderson as directors.
Qualcomm’s board of directors has unanimously voted to reject an acquisition offer from rival chipmaker Broadcom.
Broadcom made a formal public offer last week of $70 per share, valuing Qualcomm at $130BN. Although analysts suggested the offer would be too low to win the backing of the company’s board — and so it has proved. In a statement today the board said the offer “dramatically undervalues Qualcomm” and is “not in the best interests of shareholders”.
“It is the board’s unanimous belief that Broadcom’s proposal significantly undervalues Qualcomm relative to the company’s leadership position in mobile technology and our future growth prospects,” said Paul Jacobs, executive chairman and chairman of the board, in a statement.
“No company is better positioned in mobile, IoT, automotive, edge computing and networking within the semiconductor industry. We are confident in our ability to create significant additional value for our stockholders as we continue our growth in these attractive segments and lead the transition to 5G,” added Qualcomm CEO Steve Mollenkopf.
In another supporting statement Tom Horton, presiding director, added that the offer “comes with significant regulatory uncertainty” — suggesting consolidation of two major semiconductor companies may well draw close scrutiny from competition authorities.
It’s not clear how Broadcom will respond. Yesterday Reuters suggests it might be considering raising its offer if it were rejected, citing unnamed sources.
The news agency’s sources also suggested Broadcom could seek to pursue a hostile takeover by submitting directors for election to Qualcomm’s board to force it to engage, should the latter’s shareholders back its director candidates.
At the time of writing Broadcom could not be reached for comment.
The company’s interest in Qualcomm centers on the latter’s leadership in modems, says analyst Strategy Analytics analyst Stephen Entwistle.
“For a company like Broadcom, Qualcomm’s modem leadership completes the wireless picture,” he noted in a statement. “Can Broadcom develop a 5G baseband on its own? Yes, of course. But, it will take a huge R&D budget and multiple years to get customer acceptance and Broadcom’s lack of experience in 4G basebands further complicates the process as backward compatibility is a key requirement for network operators. So, the only option is to look for an acquisition to fill this gap and Qualcomm fits the bill perfectly.”
In Entwistle’s view were Qualcomm to accept the acquisition offer it would increase its dependence on the smartphone market — at a time when it has been working to expand beyond smartphones, such as via a long-in-the-works acquisition of chipmaker NXP, which has a focus on car-related applications, security-based identification and IoT.
“As Qualcomm has already patiently worked for an extended period and is close to acquiring NXP to kick start its ambitious journey we weigh more towards a Qualcomm-NXP only combination rather than a Broadcom-NXP-Qualcomm or simply a Qualcomm-Broadcom combination. Integration with Broadcom means more delays and execution risks,” he added.
Following rumors over the weekend, chipmaker Broadcom has today confirmed it has approached wireless chipmaker Qualcomm with an acquisition offer that values the company at $130BN (including $25BN of net debt).
Specifically Broadcom is offering to pay $70.00 per Qualcomm share, with $60.00 being in cash and $10.00 per share in Broadcom shares. It’s intending to use debt financing if it gets agreement for the deal.
Broadcom says the offer represents a 28 per cent premium over the closing price of Qualcomm common stock on November 2, 2017 — aka “the last unaffected trading day prior to media speculation regarding a potential transaction”.
And a premium of 33 per cent on Qualcomm’s “unaffected 30-day volume-weighted average price”.
Although a Nomura Instinet analyst, cited by Reuters, suggests that a $70 per share offer won’t be sufficient for the proposal to fly.
A Qualcomm spokesman contacted by TechCrunch declined to comment on Broadcomm’s proposal at this time. (Although in a press release it has confirmed receipt of the offer, and said its board of directors will assess the proposal to pursue “the course of action that is in the best interests of Qualcomm shareholders”.)
Qualcomm has a (long) pending acquisition, of chipmaker NXP Semiconductors NV, in the works — and Broadcom notes that its offer is not dependent on whether or not Qualcomm manages to close with NXP on the currently disclosed terms (it’s offering ~$39BN for the Netherlands-based chipmaker which has a focus on car-related applications and also security-based identification).
In a statement about its proposal, Broadcom president and CEO Hock Tan flagged “greater scale and broader product diversification” as key strategic drivers for the offer.
“The combined company will be positioned to deliver more advanced semiconductor solutions for our global customers and drive enhanced stockholder value,” he added.
Qualcomm’s share price closed at $61.81 on Friday.
The company’s stock recently took a hit after the WSJ reported that Apple planned to drop Qualcomm components in future iOS devices — in favor of Intel chips or possibly MediaTek.