Qualcomm board walks a tightrope after Broadcom meeting

Having rejected its significantly improved acquisition offer Qualcomm met Broadcom to look for common ground, but they don’t seem to have made much progress.

The Qualcomm board has always had two main public objections to Broadcom’s overtures: price and regulatory concerns. The first bid was universally viewed as too low but then Broadcom came back with a significantly improved one a couple of weeks ago.

It seems like the Qualcomm senior management don’t fancy being owned by Broadcom at any price but, as a public company, it’s ultimately not their decision alone. The first professional obligation of the Qualcomm board is to generate value for its shareholders and the improved offer put pressure on it to demonstrate why investors should turn down $82 per share when their shares are currently trading at $65.

The main narrative regarding value seems to rest on 5G and diversification. ‘Just wait until 5G kicks in,’ seems to be the Qualcomm message, because it has significant modem leadership and is well positioned to exploit all the associated opportunities expected to crop up around IoT, low-latency wireless, etc.

This is simply a call to speculation. Just imagine how high the share price will go when we’re not only selling ships into the telecoms channel, but pretty much every other industry too! That’s a strong narrative, but requires a pretty significant leap of faith. Never in its entire history, even at the peak of the dotcom bubble, has Qualcomm’s share price been much over $82, although it did touch $80 as recently as 2014.

The regulatory message seems more compelling. Such is the size of this acquisition, and the amount of component power it would consolidate, that every regulatory body in the world be taking a long, hard at it. The Qualcomm board is saying that, such is the high probability of the deal being blocked, it’s against its shareholders’ interests to endure all the distraction and disruption of going through the process only to have it fail.

This matter seems to have been the main focus of the meeting between the boards of the two companies that took place after the rejection of the $82 bid. You can see the letter the Qualcomm board wrote to the Broadcom boss after the meeting below, which thanks him for suggesting a few things but ultimately lamenting that he didn’t go nearly far enough.

This provides the basis for rejecting the acquisition at any price but surely, at some level, investors will decide the potential reward is worth the regulatory risk. Broadcom has yet to publicly respond to the Qualcomm letter, but at least one shareholder advisory firm has said it thinks the Qualcomm board should do more to find some common ground.

Broadcom is likely to ramp up its direct lobbying of Qualcomm shareholders now, probably stating it doesn’t think the incumbent board is acting in their best interests. The Qualcomm board will probably respond by reiterating its ‘just wait for 5G’ and ‘it will never be approved anyway’ arguments and the debate will culminate at the Qualcomm AGM in early March, when Broadcom will try to get a bunch of its people on the Qualcomm board. Should be fun.

February 16, 2018

Mr. Hock Tan

President and Chief Executive Officer

Broadcom Limited

1 Yishun Avenue 7

Singapore 768923

Dear Mr. Tan,

I am writing on behalf of the Board of Directors of Qualcomm Incorporated.  In our February 14 meeting, Broadcom reiterated that $82.00 per share is its best and final proposal.  The Board remains unanimously of the view that this proposal materially undervalues Qualcomm and has an unacceptably high level of risk, and therefore is not in the best interests of Qualcomm stockholders.

That said, our Board found the meeting to be constructive in that the Broadcom representatives expressed a willingness to agree to certain potential antitrust-related divestitures beyond those contained in your publicly filed merger agreement.  At the same time, Broadcom continued to resist agreeing to other commitments that could be expected to be required by the FTC, the European Commission, MOFCOM and other government regulatory bodies. Broadcom also declined to respond to any questions about its intentions for the future of Qualcomm’s licensing business, which makes it very difficult to predict the antitrust-related remedies that might be required.  In addition, Broadcom insists on controlling all material decisions regarding our valuable licensing business during the extended period between signing and a potential closing, which would be problematic and not permitted under antitrust laws.

Our Board is highly cognizant of the need to protect Qualcomm’s stockholders from the considerable risks of agreeing to a transaction that does not close.  A breakup fee in the range proposed by Broadcom does not come close to compensating for those risks.

While the current Broadcom proposal is unacceptable, our Board is intensely focused on maximizing value for Qualcomm stockholders, whether through executing on its growth strategy or by selling the Company. Our Board is open to further discussions with Broadcom to see if a proposal that appropriately reflects the true value of Qualcomm shares, and ensures an appropriate level of deal certainty, can be obtained. If such a proposal cannot be obtained from Broadcom, our Board is highly confident in Qualcomm’s ability to deliver superior near- and long-term value to its stockholders by continuing to execute its growth strategy.

Sincerely,

Paul E. Jacobs

Chairman of the Board

cc: Steve Mollenkopf

Chief Executive Officer