Technology

Why Broadcom May Now Be Handily Overreaching in Its Hostile Buyout of Qualcomm

Jon C. Ogg

Published: December 4, 2017 1:55 pm

Last Updated: January 12, 2020 5:47 am

It is no secret that a raging bull market is taking place at the current time. It is also no secret that companies want to give themselves a wider moat to fend off competition from rivals and to create pricing power when they can with their existing and potential customers. But when does all the corporate effort turn from a company doing what’s best to going too far? This is the question that now needs to be considered in the Broadcom Ltd. (NASDAQ: AVGO) ongoing and strengthening attempts to acquire Qualcomm Inc. (NASDAQ: QCOM).

It may have seemed hard to fathom that Broadcom would grow large enough to acquire Qualcomm just a few years ago. But throw in some stumbles at Qualcomm and throw in a merger of Avago and Broadcom into a super-entity and all of a sudden the world of chipsets and semiconductors looks very different. While wondering if this is a severe overreach, it’s also a great opportunistic effort from Broadcom.

Qualcomm has so far fended off attempts by Broadcom to buy the company. After all, Qualcomm is expected to generate almost $23 billion in sales for the existing fiscal year — versus about $18 billion in annual sales from Broadcom. And of course Qualcomm has its own diversification plans in its existing attempt to acquire NXP Semiconductors N.V. (NASDAQ: NXPI), a move that could add on another $9 billion or more in annual sales.

The “Merger Monday” news flow was dominated by the CVS-Aetna deal in health insurance, but Broadcom is getting about as aggressive in its attempt to acquire Qualcomm as technology investors have seen in recent times. Broadcom has announced its intent to nominate a slate of 11 people to be elected to Qualcomm’s board of directors. For the record, this slate of 11 people would on the surface represent a 100% change to the existing board of directors at Qualcomm. In actuality, Broadcom said that if its slate of board nominees is elected then the board would be expanded to 14 members. The new board would include current board members Mark D. Laughlin, Anthony J. “Tony” Vinciquerra and Jeffrey W. Henderson, according to Broadcom.

As far how this will take place, Broadcom now plans to file notification with the U.S. Securities and Exchange Commission, along with a proxy card, in connection with Qualcomm’s scheduled March 6 annual meeting. That sounds far off, but it is barely 90 days from now. Broadcom did not offer up details initially on this notion, but the company said that it intends to propose “certain other matters” for consideration by Qualcomm shareholders, which would seemingly represent a tender offer or some other considerations.

It is not a stretch to wonder what such a mega-merger of chip giants might do to the technology landscape. Regulators and consumers have every right to voice their concerns. It’s a competitive world, but two years ago there was a massive wave of consolidation in the chip and semiconductor space.

Broadcom offered $70 per share for Qualcomm back on November 6, in a stock and cash deal. Qualcomm’s board unanimously rejected the offer, stating that the offer, despite being far higher than when buyout rumors first surfaced, undervalued the company.

Here is where this would-be M&A deal gets even more interesting. Broadcom has said previously that its offer to acquire Qualcomm stands whether or not Qualcomm is successful in its $110 per share offer for NXP Semiconductors. Again, this move by Qualcomm for NXP is a massive diversification in its source of chips and semiductors and would greatly diversify its client base. The recent woes with none other than Apple Inc. (NASDAQ: AAPL), as well as the thought that Qualcomm could potentially lose Apple entirely as a customer for processors, has weighed heavily on Qualcomm shares.

As far as what Broadcom thinks, its CEO, Hock Tan, said:

Although we are taking this step, it remains our strong preference to engage in a constructive dialogue with Qualcomm. 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.

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As of Monday, the valuations are massive in raw dollar terms. Qualcomm’s market cap is now $95 billion, versus $115 billion for the post-Avago merger culmination of Broadcom. And NXP Semiconductors has a market cap of over $38 billion today. Would regulators around the globe actually allow the combination of almost $250 billion worth of companies?

Again, is this merger effort now going above and beyond too far? Broadcom is feeling a surge after getting President Trump’s thanks for relocating to the United States. But there is a current merger risk in the market over whether companies are getting too big and powerful.

Wall Street analysts initially liked the thought of a Broadcom-Qualcomm merger, but there was still some skepticism that it would pass regulatory clearance. As a reminder, a merger of that size would not only have to pass clearance in the United States. It would likely have to pass multi-jurisdictional clearances in China, Europe and elsewhere.

This recent Broadcom offer for Qualcomm is further complicated by a recent activist shareholder of NXP to boost Qualcomm’s offer for the firm. Paul Singer, of Elliott Management, owns about 4.9% of NXP’s outstanding shares and is seeking that the offer be bumped up to $125 from $110 for NXP shares. After all, there has been a significant move higher in the semiconductor space at the same time that Qualcomm shares have floundered.

What happens if Qualcomm boosts its offer for NXP? Broadcom’s intent was that the price it was willing to pay is acceptable, but what if that view changes at a new offering price? In theory, it could be enough to make Broadcom walk away. Or it could make Broadcom fight even that much harder.

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Wall Street is scratching its head on this situation. It is also taking place on a day where the Dow Jones Industrial Average and the S&P 500 have both hit new tax-enthused all-time highs. Unfortunately, the tech-heavy Nasdaq was down on Monday due to profit taking and some continued sector rotation.

And for one added wrench in this machine, Broadcom is slated to report earnings this week on Wednesday after the close of trading. Oppenheimer came out in favor of Broadcom ahead of earnings, raising its price target on Monday to $300 from $275. The firm said:

We expect a positive, and eventful call, with topics including the potential Qualcomm acquisition, recently closed Brocade purchase, iP8/X ramps, and core switching/routing… Net, we see 64%/45%/35% GM/OM/FCF margin profile driving a clear path toward $20 stand-alone/organic earnings per share. Qualcomm presents a significant upside call option, with combined company EPS power approaching $25 on conservative assumptions.

Broadcom stock closed Friday down about 2.3% at $271.56, but its shares were down another 1.65% at $267.10 in midday trading on Monday. Broadcom’s 52-week trading range is $162.40 to $285.68 and its consensus analyst price target from Thomson Reuters is $293.93.

Qualcomm shares closed down about 1.3% at $65.49 on Friday, followed by another 1.6% drop to $64.44 on Monday. The stock’s 52-week range is $48.92 to $70.42, and the consensus 12-month price target is $64.40.

NXP shares were up by more than $1.00 to $114.78 on Friday, but the stock was giving back more than half of those gains on Monday with its stock at $114.10 in the midday trading session. NXP Semiconductor has a 52-week range of $96.00 to $118.20, but most analysts have a consensus price target of closer to $112, based on merger prices.

Wall Street is not valuing this Broadcom-Qualcomm merger, at least at this exact time, with any major premium. And Broadcom has to keep in mind that there are many Qualcomm shareholders who are going to be adamant that Qualcomm shares should not be valued, in light of the 2016 and 2017 tech and market rally, at a penny less than the 2014 high when Qualcomm shares eclipsed $80 for a brief time.

Without having a seat inside the room during these communications and proposals, it’s hard to say that this is an outright overreach in the case of Broadcom. It’s also hard to not acknowledge that this is becoming perhaps the most hostile large, would-be technology merger in modern times.