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The Qualcomm Broadcom saga is just getting silly now

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Broadcom has reaffirmed its commitment to acquiring Qualcomm by lowering an offer that had already been rejected. Yes, you read that right.

The justification for this counter-intuitive move was Qualcomm’s decision to raise its bid for NXP, to placate some NXP investors and to reflect an increase in NXP’s share price since the bid was accepted over a year ago. There was considerable speculation that Broadcom might not be cool with this development but it’s response borders on the petulant.

“Broadcom today reaffirms its commitment to acquiring Qualcomm, and is adjusting its offer following the Qualcomm board’s decision to transfer $4.10 per Qualcomm share (or $6.2 billion of value) from Qualcomm stockholders to NXP stockholders,” said the Broadcom announcement.

“Broadcom’s proposed merger agreement otherwise remains unchanged, including the $8 billion regulatory reverse termination fee and 6% per annum (net of dividends) ticking fee accruing from and after the 12-month anniversary of the date of the merger agreement.”

The release concludes with the usual hectoring tone, berating the Qualcomm board for not doing the best by its shareholders and inferring that Qualcomm has been played by NXP activist shareholders. It concludes with another call to Qualcomm shareholders to show support for the Broadcom acquisition by appointing all six of its nominees to the Qualcomm board at the imminent AGM.

Qualcomm, unsurprisingly, is unimpressed by this latest development. “Broadcom’s reduced proposal has made an inadequate offer even worse despite the clear increase in value to Qualcomm stockholders from providing certainty around the NXP acquisition,” said the Qualcomm riposte. “Broadcom has refused and continues to refuse to engage with Qualcomm on price.

“In deciding unanimously to amend its original offer, made in October 2016, the Qualcomm Board concluded that Qualcomm is far more valuable with NXP than without, and took into account the following:

  • NXP’s non-GAAP operating income has increased by 20% – which means the $127.50 per share price is actually at a lower multiple than the original deal price
  • NXP provides significant strategic benefits to Qualcomm including increased revenue diversification, substantial expansion of total available markets (TAM) and greater scale in higher growth end markets of Auto and IoT
  • The strong market dynamics and positive outlook for key segments
  • High confidence in annualized cost synergies of at least $500 million based on integration planning

“Broadcom is well aware there is no ‘reduction of value by $4.10 per share’ because the transaction could not be completed at $110.00 per share.

“The Qualcomm Board is committed to maximizing value for Qualcomm stockholders, whether that be through executing its growth strategy or selling the company. Broadcom’s revised $79.00 per share proposal materially undervalues Qualcomm, fails to take into account the strategic and financial benefits of acquiring NXP, and continues to face a long and highly uncertain path to regulatory approvals.”

The long and short of it is that the respective boards are further apart than ever, it seems, and there isn’t really much point in discussing it further until the moment of truth at the AGM. That won’t stop the two of them publicly briefing against each other to win over shareholders and it will be interesting to see what Broadcom does if the AGM doesn’t go its way.

 

UPDATE – 10:00, 23 Feb 2018 – Qualcomm has written the following letter to its shareholders:

February 22, 2018

Dear Fellow Qualcomm Stockholders:

The members of the Qualcomm Board of Directors are firmly committed to maximizing value for Qualcomm stockholders. We are highly confident in Qualcomm’s strategic plan and its multiple value drivers. At the same time, we have seriously evaluated Broadcom’s proposals and explained to Broadcom – including during our meeting with them on February 14 – why their proposals are inadequate. We remain open to continued discussions if a suitable proposal is presented. To date, no such proposal has been made.

We believe Qualcomm’s experienced Board is best qualified to evaluate all opportunities to maximize value for stockholders — whether through continued execution of our growth strategy or by selling the Company. New directors would not change our openness to a transaction that makes sense for our stockholders, but would lower the overall quality of the Board at a critical time for Qualcomm.

Use the WHITE CARD to re-elect all 11 Qualcomm directors – they are working in your best interests.

THE REDUCED BROADCOM PROPOSAL REFLECTS ITS REFUSAL TO PAY A FAIR PRICE FOR QUALCOMM

By lowering its proposal to $79.00 per share, Broadcom has made an inadequate proposal even worse despite the indisputable increase in value and certainty that Qualcomm stockholders will receive from the compelling and highly accretive acquisition of NXP. Importantly, Broadcom has refused and continues to refuse to engage with Qualcomm on price.

The Board unanimously believes that Broadcom’s current $79.00 per share proposal undervalues Qualcomm, fails to take into account the strategic and financial benefits of acquiring NXP, and continues to face a long and highly uncertain path to regulatory approvals.

Members of this Board and management met with Broadcom earlier this month to discuss a path to a transaction that both appropriately valued Qualcomm and provided a sufficient level of certainty around the regulatory issues. We entered the meeting with Broadcom in a constructive manner, seeking a price increase and engagement on issues related to transaction certainty. However, Broadcom did not engage on the topic of price – repeatedly stating that $82 per share was “best-and-final.”

Broadcom also insisted it had to control all material decisions regarding our licensing business, one that has realized annual revenues exceeding $7 billion, during a lengthy regulatory process, despite the fact that this is not permitted under antitrust laws. Additionally, Broadcom was unwilling to agree to commitments that could be expected to be required by the FTC, European Commission, MOFCOM and other government regulatory bodies. Their proposed $8 billion reverse termination fee – which equates to only $5.40 per share – does not come close to compensating our stockholders for the substantial value destruction likely to result if the transaction were to fail to close due to regulatory issues.

The Qualcomm Board is highly confident in our ability to deliver $6.75-7.50 in FY19 Non-GAAP EPS. At any realistic multiple, that would result in a value for Qualcomm well in excess of even an $82.00 proposal. Moreover, the value to Qualcomm stockholders of executing our growth plan is not only higher but carries far less risk than Broadcom’s proposal. We are unwilling to give Broadcom an option at $79.00 per share for 18 months while we deliver on our strategy, as 5G gains momentum and NXP is integrated.

CLEAR PATH TO COMPLETE STRATEGICALLY AND FINANCIALLY COMPELLING NXP TRANSACTION

In deciding unanimously to increase its original offer, made in October 2016, the Board concluded that Qualcomm is far more valuable with NXP than without, and took into account the following:

  • NXP will provide significant strategic benefits to Qualcomm including increased revenue diversification, substantial expansion of serviceable addressable markets (SAM) and greater scale in higher growth industry segments of Auto and IoT
  • The strong market dynamics and positive outlook for key industry segments
  • High confidence in annualized cost synergies of at least $500 million based on integration planning
  • NXP’s non-GAAP operating income has increased by 20% – which means the $127.50 per share price is actually at a lower multiple than the original deal price

We are optimistic that in the near term the transaction will receive the necessary additional tenders as well as the last required regulatory clearance, and that the acquisition will close shortly.

THE QUALCOMM BOARD IS SQUARELY FOCUSED ON MAXIMIZING THE VALUE OF YOUR INVESTMENT

Qualcomm is well positioned to create value for stockholders over the near- and long-term, particularly with a clear path to completing the NXP transaction. At the same time, should Broadcom present a proposal that delivers superior value and sufficiently protects downside risk to you, we will pursue a sale. Thus far, Broadcom has done neither.

We urge you to vote FOR the re-election of Qualcomm’s highly qualified Board on the WHITE proxy card TODAY to protect the near- and long-term value of your investment. Remember, vote only the WHITE proxy card and discard any Blue proxy cards you receive from Broadcom.

Sincerely,

The Qualcomm Board of Directors


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