Broadcom’s hostile $130 billion bid for Qualcomm looks dodgy

Even if Broadcom can find the cash there are many reasons to be sceptical about what would be the largest ever tech-sector acquisition.

Qualcomm’s shares have understandably risen having received an unsolicited bid that valued the company at $70 per share, but the fact that they only rose to a peak of $65 and have since declined implies a large degree of caution from investors, which is also understandable.

Firstly the bid is unsolicited, so there’s no guarantee Qualcomm will even accept it. “The Qualcomm Board of Directors, in consultation with its financial and legal advisors, will assess the proposal in order to pursue the course of action that is in the best interests of Qualcomm shareholders,” said the company in a statement.

It’s worth noting that Qualcomm’s shares were close to the $70 mark as recently as January of this year and have gone down the toilet somewhat thank to all its grief with Apple and certain national regulators. Several publications are reporting that Qualcomm is likely to reject the bid and, while that won’t necessarily be the end of it, that’s not a great start.

And then there’s the cost. The current Broadcom is actually the product of another mega-acquisition by Avago. That cost $37 billion and the company has subsequently pledged a further $6 billion to buy Brocade. Where it’s going to suddenly dig up over $100 billion (one seventh of the price will be paid for by Broadcom shares) from will be interesting to see.

Broadcom is also a much smaller company than Qualcomm. Its market cap is higher but its revenues and net income are much lower, resulting in a price-earnings ratio for Broadcom of a massive 223 for some reason, compared to Qualcomm’s more normal 38. That alone would appear to make this a very risky move for Qualcomm shareholders.

And lastly there are the inevitable regulatory concerns. The Brocade acquisition is still going through the approval process, as is Qualcomm’s acquisition of NXP. Something this huge would face very extensive scrutiny from regulators, especially in the US, regardless any Trump-pleasing moves by Broadcom. This would consolidate a lot of mobile silicon in the hands of one company, something that’s unlikely to reassure regulators already fining Qualcomm for abusing its dominant position.

Broadcom seems to be anticipating hostility from the Qualcomm board and its public statements seem designed to appeal straight to investors.

“Broadcom’s proposal is compelling for stockholders and stakeholders in both companies,” said Hock Tan, President and CEO of Broadcom. “Our proposal provides Qualcomm stockholders with a substantial and immediate premium in cash for their shares, as well as the opportunity to participate in the upside potential of the combined company.”

“This complementary transaction will position the combined company as a global communications leader with an impressive portfolio of technologies and products. We would not make this offer if we were not confident that our common global customers would embrace the proposed combination. With greater scale and broader product diversification, the combined company will be positioned to deliver more advanced semiconductor solutions for our global customers and drive enhanced stockholder value.”

“We have great respect for the company founded 32 years ago by Irwin Jacobs, Andrew Viterbi and their colleagues, and the revolutionary technologies they developed. Following the combination, Qualcomm will be best positioned to build on its legacy of innovation and invention.

“Given the common strengths of our businesses and our shared heritage of, and continued focus on, technology innovation, we are confident we can quickly realize the benefits of this compelling transaction for all stakeholders. Importantly, we believe that Qualcomm and Broadcom employees will benefit from substantial opportunities for growth and development as part of a larger company.”

Geoff Blaber of CCS Insight is unconvinced. “This approach from Broadcom is fraught with challenges and in its current form is highly unlikely to proceed,” he said. “Qualcomm is likely to resist primarily on the basis that it undervalues the company and its growth opportunity in IoT. It is an unwelcome distraction for Qualcomm as it seeks to close the NXP acquisition, negotiate with regulators and work through the ongoing dispute with Apple.”

“Other central factors are the complexity of integration, particularly large proposed acquisitions for both companies that are still to compete (NXP and Brocade). Similarly, regulatory scrutiny is likely to be substantial and would add up to make this a highly risky transaction.”

Since it seems likely that the bid will be rejected, Broadcom is presumably preparing for a lengthy hostile battle. It may well increase the offer price even further but unless it can convince a large majority of shareholders that Qualcomm’s shares are unlikely to ever hit $70 again it’s hard to see how it will overcome the objections of the board, let alone all the other obstacles in the way, and pull this deal off.