A year ago, Qualcomm chief executive Steve Mollenkopf was riding high. The chipmaker was planning to take over rival NXP in the biggest deal ever in the sector. The resolution of regulatory investigation in China had unlocked a wave of new smartphone licensing deals in the world’s largest mobile market.
In an interview with the FT last November, Mr Mollenkopf said he could “see a path” to his company becoming the world’s largest chipmaker.
Then in January, Apple struck. One of Qualcomm’s largest customers hit it with the first blow in what would become a flurry of litigation and snowballing regulatory inquires over its pricing and alleged anti-competitive behaviour.
By September, Qualcomm had lost a quarter of its value and its stock was trading close to its lowest point for several years.
This week Qualcomm was presented with another shot at creating a challenger to Intel and Samsung as the world’s top chip supplier — but not in the manner that Mr Mollenkopf would have liked.
An unsolicited $130bn takeover bid from rival Broadcom would create a semiconductor juggernaut, the world’s largest tech deal creating a one-stop shop for smartphone makers looking for everything from cutting-edge processors to wireless networking. But the timing and price looks opportunistic to its potential partner.
Qualcomm’s board is only just beginning its evaluation of the proposal but people familiar with the company’s thinking say that the $70-per-share offer is well below what it would be prepared to accept, having traded close to that level just a year ago.
They dismiss the bid as an attempt to capitalise on Qualcomm’s weaknesses, as it faces the prospect of a long fight with Apple and potential delays to closing the NXP deal. These people argue that the price disregards the company’s future earnings potential, especially as it builds towards its first deployment of next-generation 5G wireless networks by the end of the decade.
And there is also the problem of form. Qualcomm’s board and senior management were not happy finding out about Broadcom’s potential offer through media reports on Friday afternoon, according to people close to the group.
Qualcomm has hired advisers including Goldman Sachs, Evercore and Sard Verbinnen in an effort to defend the company from opportunistic takeovers.
But Broadcom’s chief executive Hock Tan will not be easily deterred. The Malaysian-born businessman is no stranger to complex takeover negotiations, having completed five significant deals in five years, including — as head of Avago — his $37bn takeover of the larger Broadcom in 2015.
Talking to the FT, Mr Tan says that he was “still very hopeful . . . that both sides can agree on a mutually beneficial transaction”. He declines to comment on whether Broadcom would consider raising its bid, adding that “we have put forward what we think is a compelling offer” and pointing to his previous deal record as proof that the company is “disciplined acquirer”.
Hock Tan, Broadcom chief executive, has put together a string of attention-grabbing deals © AP
Broadcom could even seek to put its own appointees on the board of Qualcomm by winning over existing shareholders in a so-called proxy battle ahead of Qualcomm’s AGM in 2018, say people informed on the matter.
But it is not just Qualcomm’s management that might take issue with a deal bringing together two of the world’s largest suppliers of chips, which have become the essential technology behind the global shift to mobile devices, connected cars and equipment, and the ‘broader internet of things’.
People familiar with Qualcomm’s thinking say that there are also concerns that the deal presents potentially insurmountable regulatory issues. According to Broadcom’s most recent regulatory filings, about half of its revenues in wired infrastructure overlap with Qualcomm and NXP, while nearly 30 per cent of its sales in wireless communications overlap with its San Jose rival.
“A deal would face antitrust scrutiny in markets where Broadcom and Qualcomm have leading positions, such as integrated circuits used in global navigation satellite systems,” says Erik Gordon, professor at Ross School of Business, University of Michigan.
“This approach from Broadcom is fraught with challenges and in its current form is highly unlikely to proceed,” adds Geoff Blaber, analyst at CCS Insight.
The NXP deal could be key, according to analysts. Mr Tan says he would be prepared to press ahead with Qualcomm’s NXP deal, on the condition that the current $110 price does not increase as some shareholders in NXP have been agitating for in recent months.
That combination would make the deal “much more transformational” than simply buying Qualcomm alone, says Karl Ackerman, analyst at Cowen.
“The sensors, analogue, and near-field communications portfolio would solidify Qualcomm’s ability to set the 5G standard, which will be a key technology in autonomous vehicles and the industrial internet of things,” he says.
Other Wall Street analysts are equally bullish on the financial benefits of the transaction, thanks to potential synergies. Crucially, while Qualcomm and Apple are at loggerheads, Broadcom has built a stronger relationship with the iPhone maker.
“We think we can improve on and optimise their business model,” Mr Tan says. “We believe we can be very constrictive in their relationship with key global suppliers . . . We like to think we could generate a better financial return to shareholders through this constructive approach.”
He says he would be “very practical” about the value of Qualcomm’s intellectual property — a key sticking point with Apple.
“We believe there should be some reset in the business model,” he says, adding that he did not want to “talk out of school” before engaging with Qualcomm’s management.
Yet Broadcom would have to face challenges internally as well as externally. Ben Bajarin, analyst at Creative Strategies, suggests that the cultural difficulties of integration would be even larger than they normally are with large-scale M&A.
“It’s not the most friendly culture,” he says of the combined Broadcom and Avago. “A lot of people left after they merged because it is hard to work there. It’s not really a culture of R&D . . . It’s all about maximising profits.”
Mr Tan calls that view “hogwash”.
“When we buy a business we look at the strong, core sustainable product lines,” he says. “We very often invest even more than the original owners have invested in those businesses.”
However, he says that many of his targets have “adjacent businesses that are really not core but they can’t help dabbling in. In those businesses, we tend to go through an asset rationalisation”.
Some analysts have suggested that the same issue that could agitate regulators — creating a one-stop shop for key smartphone silicon including Bluetooth, WiFi and modems — would give the combined company greater negotiating power with the likes of Apple and Samsung.
Mr Tan, however, is sceptical of that strategy. “Much as I’d love to dream about that, that doesn’t work,” he says, pointing out that even a $200bn chip company is small compared to Apple, the world’s most valuable company.
“These guys are so much bigger than us,” he says. “They are the masters of the universe, I’m a mere mortal.”