Qualcomm Deal to Create Chip Giant Faces Long Odds
Last week Hock Tan, CEO of the chipmaker Broadcom, joined President Donald Trump in the Oval Office for a major announcement: the company would move its headquarters from Singapore to the US.
That turned out to be a prequel to an even bigger announcement Monday: Broadcom offered to pay $105 billion for fellow chip giant Qualcomm.
It’s not hard to see why Tan is trying to get chummy with Trump. He’s going to need help to get this longshot bid approved. The acquisition would be the biggest in tech history, dwarfing Dell’s $67 billion acquisition of EMC in 2015. Qualcomm will likely reject the offer, at least initially, though the company pledged Monday to “assess the proposal.” If the companies reach a deal, it is certain to face antitrust scrutiny not just in the US, but around the world.
While they’re not as well-known as Apple and Samsung, Broadcom and Qualcomm are both powerhouses in smartphones. Broadcom, which was known as Avago before last year, makes WiFi chips that are found in every current iPhone model and most Android phones. Qualcomm, meanwhile, owns key patents over wireless technology. Its Snapdragon platform powers most Android phones and its cellular modems are found in roughly half of all iPhones. Together, the companies would generate roughly $40 billion in annual revenue, making the combined entity the world’s second-largest chipmaker, according to Gartner.
But the deal will be exceedingly complicated. For starters, both Broadcom and Qualcomm are still trying to overcome regulatory hurdles to complete previously announced mergers. Broadcom plans to buy networking company Brocade Communications for $5.9 billion, but the acquisition was delayed due to a review by the US Committee on Foreign Investment, which investigates the national-security consequences of foreign investments in the US. Qualcomm struck a deal to buy Dutch chipmaker NXP, whose components are key to smart cars among other products, for $39 billion; but that deal is being held up by European regulators.
Regulators are certain to scrutinize a Broadcom-Qualcomm pairing as well. Together, the companies would control a majority of wireless chipsets for smartphones. Qualcomm has already faced numerous antitrust complaints. China fined Qualcomm $975 million for antitrust in 2015, South Korea fined it $854 million last year, and last summer the company lost an appeal over antitrust charges in the European Union and is awaiting a fine. Now the US Federal Trade Commission is investigating the company for alleged anticompetitive behavior and Apple, one of Qualcomm’s largest customers, is suing the company for $1 billion (Qualcomm is also counter-suing the Apple).
“It’s hard for me to see how it could get approved from a regulatory standpoint because it would increase the power they have over their smartphone customers,” says semiconductor industry analyst Linley Gwennap. He points to the EU’s concerns over Qualcomm’s bid for NXP, which has little overlap with Qualcomm’s current products. “It’s just that European Union believes that giving any smartphone technology to Qualcomm is just waving the cape in front of the bull,” Gwennap says.
Analysts suggest the companies could spin off Qualcomm’s wireless division as a concession to regulators, but that would make the deal less appealing. Broadcom has a tendency to hold on the most profitable parts of the companies it acquires and shed the more-risky parts, says Patrick Moorhead, an analyst with Moor Insights & Strategy. For example, after Avago acquired Broadcom, it sold Broadcom’s Internet of Things business to Cypress Semiconductor. Spinning off Qualcomm’s wireless business would essentially be the opposite strategy: dumping one of the most successful parts of its existing business.
But all of that is assuming that Qualcomm accepts Broadcom’s bid. Moorhead calls Broadcom’s offer “a lowball one,” saying Broadcom is trying to take advantage of Qualcomm’s troubles with regulators and with Apple. Qualcomm shares had fallen 16% over the past year before rising on early reports about Broadcom’s bid.
Broadcom traces its roots to the semiconductor unit of Hewlett-Packard that was spun off as part of Agilent Technologies in 1999. Private-equity firms KKR and Silver Lake Partners purchased the unit in 2005 and renamed the company Avago. Under Tan, the company acquired several other chip companies after going public in 2009, culminating in the Broadcom deal that was completed last year.
“Hock Tan is an investor at heart,” says Gwennap. “He sees Qualcomm as a company that is in distress, a great opportunity for them to pick up this asset at a lower price and then take advantage of any rebound once these legal issues are resolved.”
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