The $121 Billion Offer Price
The $121 billion offer by Broadcom to troubled Qualcomm is making headlines. This price could be the biggest-ever in the technology space. Yet, Qualcomm is not accepting the offer.
Broadcom’s offer price of $82 per share ($60 in cash and $22 per share in Broadcom stock) is the biggest and final bid as per its chief executive Hock Tan.
Qualcomm Faces Critical Issues
The offer by Broadcom comes at a time when Qualcomm is facing several critical problems.
Qualcomm is in a legal dispute with its largest customer Apple. The dispute is regarding a billion dollar patent impingement including chip royalty. The firm is also dealing with lawsuits from regulators from the United States to Korea. To compound the matters, Huawei has stopped paying patent royalties. Also, the company is struggling to complete the purchase of NXP semiconductors for $39 billion. As a result of the problems, several customers mainly in China think of removing Qualcomm out of their devices.
Why Broadcom is in a Great Position
In 2015, Broadcom merged with Avago Technologies (each with margins of 24% and 38% respectively). The combined entity has successfully come out with 46% operating margin. Broadcom has a good track record in cost-cutting and managerial efficiency. Those strengths will help Qualcomm’s if the deal goes through.
How Broadcom’s Business Model Will Be Strengthened
Broadcom’s source of revenue comes from patent licensing segment which accounts around 68% to 72%. The chip division gives 18% to 20% margin. If the deal goes through, the company will be supplying everything from modems and application processors to Wi-Fi and GPS chips. This big deal in technology space will enable the semiconductor juggernaut Broadcom to become the market leader. Broadcom will become the leading chip producer for devices ranging from mobile phones to electric vehicles.
Why Google and Microsoft are Concerned?
Microsoft and Google are concerned about the deal. You will see the reasons now.
Many phone and tablet makers use Qualcomm processor to run the Android operating system. (Android enjoys 85% smartphone market share.) And, Microsoft has said that Windows 10 PCs will be using Qualcomm chips. Microsoft is planning to push hybrid PCs and tablets into the market. These products will use lesser power than Intel-based PCs and will compete strongly with Apple’s iPad. Microsoft and Google may prefer independent QUALCOMM for a better business alignment.
Note: Broadcom supplies chips for Apple’s iPhone and iPad. Broadcom owned Qualcomm may move closer to Apple.
Broadcom’s Risk Factors
The financial debt will mount for Broadcom to $100 billion including Qualcomm’s existing debt. (The figure includes the purchase requirement of NXP Semiconductors.) Broadcom is projecting EBITDA of roughly $23 billion for the joint unit. The figure is after figuring in cost savings. Therefore, the debt to EBITDA ratio will get increased by 4x. This number is relatively high for the technology industry. Therefore, the deal will come under intense regulatory scrutiny.
Why Qualcomm is Rejecting the Offer Price
This deal is continuously being rejected by Qualcomm. This act leaves the takeover bid to be decided by shareholders meeting next month (March, 6). Qualcomm management is seeing the Broadcom’s offer opportunistic at a time when the company is facing problems. The management believes these problems can be solved. Qualcomm believes that the launch of 5G will help the firm to combat problems. (5G is a wireless standard that will connect a wider range of devices than existing ones.) Another reason for rejection is, the company feels the offer price is below par.
The reason for rejecting the deal can be summarized in a single statement by Qualcomm co-founder, Jacobs.
“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,” Qualcomm’s Jacobs wrote to Broadcom’s Tan.
Summary: What Next?
The focus is on March 6th shareholder’s vote. The vote will epitomize a superior between Broadcom’s tactic, under Tan, of acquiring companies and boosting profits and Qualcomm management’s promise of growth fuelled by new products and technologies.