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Blog: 3 reasons a Qualcomm/Broadcom tie up is crazy

06 NOV 2017

Broadcom stunned the tech industry with an unsolicited bid to acquire US chip giant Qualcomm for $130 billion.

Specifically, Broadcom is offering $70 per share, which represents a 28 per cent premium over Qualcomm’s 2 November stock market closing price of $54.84. Broadcom’s spin is the transaction would create “a leading diversified communications semiconductor company” and accelerate the pace of innovation in the semiconductor space.

The deal would make the combined entity the third largest semiconductor company by revenue (see image left, click to enlarge), putting it just behind the twin titans Intel and Samsung. It would also be the largest ever acquisition in the tech space – by quite some distance (almost doubling Dell’s $67 billion buyout of EMC in 2015).

However, a report from Financial Times tipped Qualcomm to reject the bid, and indeed the company should. Here are three reasons a tie-up between the two companies is just as crazy as it sounds:

Value
The main reason cited in Financial Times story for Qualcomm’s planned rejection is price. Despite an ongoing patent spat with Apple hitting Qualcomm’s valuation in a serious way, the US-based company reportedly believes Broadcom’s offer is too low – and Qualcomm isn’t the only one.

Anshel Sag, an associate analyst at Moor Insights and Strategy, told Mobile World Live Broadcom’s offer doesn’t really amount to much when compared to Qualcomm’s current value. And Qualcomm is poised to become even more valuable once it closes its pending deal with NXP Semiconductors, he noted.

“Qualcomm combined with NXP would be a vastly larger company by revenue than Broadcom and the current Qualcomm is already quite a bit larger than Broadcom today (after Avago bought Broadcom),” he said.

Geoff Blaber, CCS Insight’s VP of research for the Americas, agreed, noting Broadcom’s offer “undervalues the company and its growth opportunity in IoT”.

Market research company Strategy Analytics indicated Broadcom is likely after Qualcomm’s modem business, looking to fill a hole in its portfolio. But like Sag and Blaber, the company noted Broadcom’s offer “clearly undervalues” Qualcomm, especially given that NXP could bring with it a new non-smartphone-based revenue stream and Qualcomm’s first mover advantage on 5G products.

“Qualcomm is an established company with a strong track record of execution and one would hardly expect it to be an acquisition target to a relatively smaller company,” Strategy Analytics’ Sravan Kundojjala and Stuart Robinson pointed out in a blog post. “Still Broadcom dared to do this.”

Timing and regulation
Both Sag and Blaber also noted the timing of the bid is bad for both companies.

Sag pointed out Broadcom is still working through a separate merger with Brocade, the deadline for which was recently pushed back thanks to regulatory review hurdles at the US Federal Trade Commission and Committee on Foreign Investment in the United States.

Of course, Qualcomm is also tied up with trying to secure regulatory review of its aforementioned merger with NXP Semiconductors. Completion of the deal could be pushed into 2018, NXP CEO Richard Clemmer said in October.

Blaber said Broadcom’s proposal “is an unwelcome distraction for Qualcomm as it seeks to close the NXP acquisition, negotiate with regulators and work through the ongoing dispute with Apple,” adding: “regulatory scrutiny is likely to be substantial and would add up to make this a highly risky transaction.”

Strategy Analytics piled on, arguing “Broadcom needs Qualcomm more than Qualcomm needs Broadcom” and Qualcomm would do better to stay focused on the “already clear path” in front of it.

Innovation
Speaking of Apple, though, Sag indicated a deal could prove harmful to industry innovation and the negotiating power of smartphone vendors, including the iPhone giant in particular.

Sag explained: “There are a lot of businesses that both companies have that are in competition with one another which means lots of cutting. Avago/Broadcom’s MO is to buy, chop, sell off and raise prices. They do it again and again. I don’t see how someone like Apple would want this deal to go through. If you combined Qualcomm, NXP and Broadcom you’ve got most of the chips in the iPhone and that hurts Apple’s ability to negotiate.”

In addition to impacting the RF-front end segment of the market, Sag pointed out a merger between Qualcomm and Broadcom would also remove competition from the Bluetooth and Wi-Fi markets as well.

If Qualcomm for some reason does decide to accept, the latter element could prove key to the whole endeavour.

After a wave of recent consolidation in the semiconductor space and influencing political factors, it seems unlikely already wary US regulators will be keen to approve a merger which would shift a US company to overseas (Singaporean) control, cut jobs and harm competition.

The editorial views expressed in this article are solely those of the author and will not necessarily reflect the views of the GSMA, its Members or Associate Members.

Author

Diana Goovaerts

Diana joins Mobile World Live as its new US Editor, reporting on infrastructure and spectrum rollouts, regulatory issues, and other carrier news from the US market. Diana comes to GSMA from her former role as Editor of Wireless Week and...

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