Qualcomm Meets Broadcom After Rejecting Revised Offer

The Broadcom Offer

Broadcom’s attempt to acquire Qualcomm to create a wireless powerhouse was thwarted yet again when its revised bid was rejected unanimously by Qualcomm’s board of directors.

In November, Broadcom offered $70 a share, of which $60 was to be paid in cash and the rest in shares. The revised offer, which is Broadcom’s "best and final offer", values each share at $82 ($60 a share in cash and the rest in shares).

Considering the fact that the deal reduces competition, there’s a good chance that regulators in several countries will oppose it. If the deal is cancelled on account of regulatory opposition, Broadcom will pay $8 billion for the disruption caused.

Broadcom expects to obtain necessary approvals to close the deal within a year. If it takes longer, it will pay 6% a year of the amount to be paid in cash as compensation.

Since this is an unsolicited, hostile bid to take over control of the company, Broadcom is also looking to replace the entire Qualcomm board with 11 people of its own choosing. Shareholders will cast their votes on Mar 6.

Is Qualcomm’s Concern Justified?

Qualcomm Chairman Paul Jacobs stated in the open letter to Broadcom CEO Hock Tan, “Your proposal ascribes no value to our accretive NXP acquisition, no value for the expected resolution of our current licensing disputes and no value for the significant opportunity in 5G," and “Your proposal is inferior relative to our prospects as an independent company and is significantly below both trading and transaction multiples in our sector.” Moreover, the bid contains "serious deficiencies in value and certainty."

It’s true that the automotive and IoT segments are greatly expanding Qualcomm’s addressable market, being new areas it is expanding into. Moreover, Qualcomm has also taken a lead in 5G technology development and recently announced agreements with 19 carriers and 18 handset OEMs, so it’s clearly getting ready to charge into the market. Any merger-related disruption in this schedule, or if it resulted in the loss of major customers, could come in the way of its capturing the dominant share of the market that it is targeting. So it’s true that if after this disruption, the merger doesn’t go through because of regulatory opposition, the amount proposed to be paid wouldn’t compensate Qualcomm adequately.

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Also note that customers won’t be thrilled with the combination because it has the potential to become even more dominant in the wireless market, thereby driving up prices.

Summing Up

Qualcomm was initially not considering a buyout offer at all but it has now softened its stand because some shareholders have expressed interest in the deal should it prove to be truly attractive. Broadcom for its part, and especially CEO Hock Tan has considerable experience wrapping up acquisitions although the size of this deal makes it a different animal altogether. Whether the hostile bid for the company will be successful is still an open question.

Qualcomm shares carry a Zacks Rank #4 (Sell) while Broadcom shares have a Zacks Rank #3 (Hold). Semiconductor peers worth buying instead are #1 (Strong Buy)-ranked Cabot Microelectronics Corp. (NASDAQ:CCMP) , or #2 (Buy)-ranked Diodes Inc. (NASDAQ:DIOD) and Mellanox Technologies (NASDAQ:MLNX) . Or, simply head over to .

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