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Bought Brocade and played by Qualcomm – Broadcom’s busy week

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Just as the hangovers from the Brocade celebrations are subsiding, Qualcomm investors are presenting a different headache by holding out for a significant price increase.

It was announced back in November 2016, but now it is officially a done deal. It took some ringfencing of the work it does for Cisco, and a bit of business offloading to Extreme Networks and Arris, but Broadcom has finally completed its $5.9 billion acquisition of Brocade. Clearly thinking he was on a roll, CEO Hock Tan turned his attention to Qualcomm.

The potential acquisition was beaten back by the Qualcomm board, but according to Bloomberg sources, there might be a way for Tan to complete his shopping spree; just spend a bit more cash.

The initial bid was a considerable one; $130 billion at $70 per share. Just to put things in perspective, the share price at the time of writing is $66.47, while the trading day before the initial bid from Broadcom, it was $61. Broadcom might have thought it was already slapping a bit of a premium on the price, however investors have said they might be swayed if another $10 was added to each share.

Tan is usually a man who gets his way, so the initial rejection could have put a dent in his ego, though Qualcomm investors seem to be tempted the beast out of the cage. We already know Tan is a serial-acquirer, but this seems like putting a glass of whiskey just in reach of an alcoholic.

“We would be very interested in evaluating an offer that begins with an 8,” Daniel O’Keefe of Artisan Global Value Fund, a Qualcomm shareholder, told Bloomberg.

You have to wonder how much is going to be too much. Broadcom has already reaffirmed its position after being back-handed by Qualcomm, though it hasn’t upped the ante yet. O’Keefe seems to be trying to tempt another bid to instigate a negotiation. Broadcom has seemingly shown its cards, now Qualcomm investors might just see an opportunity to make money. And you can hardly blame O’Keefe and his cronies, that is their job. Buy shares to make a profit on dividends and sale of the shares.

You also have to wonder where Broadcom is going to get the cash from as well. Aside from the Brocade acquisition for $5.9 billion, it has also snapped up Emulex for $609 million and LSI for $6.6 billion in the last couple of years. The mega-merger with Avago for $37 billion might explain the bank account to a degree, but only $17 billion in cash changed hands here. Broadcom has a market capitalization of $112.15 billion and net revenues of $13.240 billion in 2016.

Whether Qualcomm investors are pushing themselves out too far remains to be seen. Qualcomm certainly can continue as a very profitable business, though this would partly be reliant on the resolution of the numerous lawsuits it is currently involved in. It could also do with fixing the broken relationship it has with Apple; losing the iLeader as a customer would be disastrous.

An extra $10 a share would certainly push the endurance of Tan, who is starting to look like the Del-boy of the chip world, but considering his track record it would surprise few if this turns into a prolonged negotiation as Qualcomm shareholders leave the door slightly ajar.


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