February 6, 2018

Breakingviews: Broadcom Ups Difficulty Level For Qualcomm Owners

by Breakingviews.

Broadcom has raised not just its offer for rival chipmaker Qualcomm, but the difficulty level deciding what to make of it. The $120 billion-plus hostile bid, at $82 a share, represents a level Qualcomm’s stock has surpassed for only three days in nearly three decades. But there are questions for Qualcomm shareholders and the company’s board led by Chairman Paul Jacobs that money can’t answer – and that the offer of more Broadcom stock definitely doesn’t.

Superficially, the new offer is attractive. First, it’s almost a 50 percent premium to Qualcomm’s share price back in early November before Broadcom revealed its initial $70-a-share offer. The company run by Steve Mollenkopf is short on options for growth, which explains its own bid for smaller rival NXP Semiconductors, and its operating profitability has been in fairly steady decline. The switch to 5G mobile-chip technology is going to be slow. Apple, a major customer, is in a legal fight with Qualcomm over royalties, another uncertainty for investors.

But the way out offered by Broadcom is laden with caveats. Antitrust approval is the big uncertainty – and sweetening the offer doesn’t help with that. Qualcomm’s offer for NXP has been grinding through the Chinese bureaucracy for well over a year. Whatever the reasons, relations between China and the United States aren’t getting any smoother and the semiconductor industry is a sensitive one.

Broadcom’s raised bid also creates a big problem. The hike in value is all in shares, which means Qualcomm’s owners would end up with roughly a quarter of the merged company. The cost savings the bidder has outlined are worth perhaps $24 billion today after tax at the new 21 percent U.S. rate and on a multiple of 10. The premium on offer is worth more like $40 billion. The more Broadcom seems to be overpaying, the less attractive that is to future shareholders. Moreover, the stock component is now large enough that Broadcom’s investors will have to be given a vote.

All the same, Qualcomm should probably agree to talk. Broadcom says it will offer a “significant” break fee in case trustbusters nix the deal. Jacobs ought to ask for a very high number – as much as $20 billion, say – and put the pressure back onto Broadcom boss Hock Tan, whose investors look set to lose out either way. Finally engaging with Tan might be the best way to make him go away.

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