Overview of the deal
Acquirer: Broadcom Ltd. (NASDAQ: AVGO)
Target: Qualcomm Inc. (NASDAQ: QCOM)
Estimated value: $130bn ($25bn including net debt)
Announcement date: 2/11 - 2017
Acquirer Advisors: Moelis & Company, Glass Lewis, ISS (Board of Directors)
Target Advisors: Goldman Sachs, Evercore, Sard Verbinnen (Board of Directors)
This takeover bid ($130bn) for Qualcomm, from rival Broadcom, would create a semiconductor giant because it would be a one-stop shop for smartphone makers looking for everything from cutting-edge processors to wireless networking.
Buying Qualcomm would make Broadcom the third-largest chipmaker, behind Intel Corp. and Samsung Electronics Co. The combination of the two companies would generate extensive synergies and create a dominant wireless business. Since Qualcomm’s most profitable unit, which licenses mobile phone technology, is under assault from regulatory actions around the world and from Apple Inc, a change of management in Qualcomm after the successful deal could have helped to resolve the dispute with Apple Inc.
Company details (Broadcom Limited)
Broadcom Limited is a diversified global semiconductor leader built on 50 years of innovation, collaboration and engineering excellence.
- Founded in 1991 and headquartered in Irvine, California, US
- CEO: Hocke E. Tan (Since 2016)
- Number of employees: 15,700
- Market Cap: $101.619bn - EV: $100.32bn
- LTM Revenue: $17.64bn - LTM EBITDA: $7.52bn
- LTM EV/Revenue: 5.69x - LTM EV/EBITDA: 13.33x
Company details (Qualcomm)
Qualcomm is an American multinational semiconductor and telecommunications equipment company that designs and markets wireless telecommunications products and services.
- Founded in 1985 and headquartered in San Diego, California, US
- CEO: Steven Mollenkopf (Since 2014)
- Number of employees: 33,500
- Market Cap: $94.73bn - EV: $85.25bn
- LTM Revenue: $22.36bn - LTM EBITDA: $6.14bn
- LTM EV/Revenue: 3.81x - LTM EV/EBITDA: 13.88x
Projections and assumptions
Rationale for the deal can, initially, be simplified if we take a step back and realise that the expected size and market share of the combined companies would make them an even larger player in the semiconductor and wireless telecommunication technology industry. The IP assets of Qualcomm are tremendous, and the size of the combined companies would have made them the worldwide driving force in the semiconductor space.
In addition, a potential deal would have brought Broadcom back into the heart of the IoT microchip market, opening a new potential business expansion opportunity.
Qualcomm believes the deal would have been dilutive compared to the outstanding NXP acquisition for $44 billion, which is expected to be accretive. As a result of the planned deal between NXP and Qualcomm, Broadcom has cut their offer to $117 billion, which had decreased the probability of the deal going through.
Furthermore, the deal would have been financed with 25% debt and Broadcom confirmed that the reduced bid of $79 has been its final proposal, which Qualcomm sees as an undervaluation of the company despite that on 2/11/17 (the announcement date) Qualcomm shares closed at $54.84, and so Broadcom’s offer yields a 44% premium (around 11% higher than the average acquisition premium paid in 2016).
The deal would have changed the semiconductor sector to a great extent. Although there might have been some short-term benefits for the largest shareholders of these companies, experts believe that the two companies do not belong together.
The long-term impact of such a deal could have been a loss in innovation in the mobile and wireless space, which could have harmed both consumers who have enjoyed the inventions of Qualcomm in their daily use of smartphones, as well as to the broader mobile ecosystem that has depended on Qualcomm to continue the advancement of wireless for mobile and industrial use. Furthermore, a loss of innovation for the US market leader would have strengthened the position of competitors, such as Huawei and therefore would have posed a red flag to the US economy.
Both Broadcom and Qualcomm have profitable business models and focuses on returning a profit to investors. However, the Broadcom business model, which is heavily focused on short-term financial efficiency, commands extracting all potential profit as soon as possible and returning it to shareholders through dividend payments. On the other hand, the Qualcomm model targets long-term sustainable growth by expanding the company and entering adjacent markets. Hence, by some, this deal is considered to have been a loser in the long term.
Security Alert Analysis
The executive order, signed by President Trump said: “The proposed takeover of Qualcomm by the Purchaser is prohibited, and any substantially equivalent merger, acquisition, or takeover, whether effected directly or indirectly, is also prohibited.”
First and foremost it should be noted that any combination of the two businesses would face severe scrutiny from competition and authorities in terms of material antitrust or other regulatory issues.
The Committee on Foreign Investment in the United States (CFIUS) ordered Qualcomm to postpone a shareholders’ meeting to investigate national security concern over Broadcom’s hostile takeover bid for Qualcomm.
CFIUS’s main concern was that after the completed acquisition, Broadcom would have cut back on R&D in Qualcomm’s research divisions which would have given opportunity to Chinese competitors, such as Huawei, to develop an edge on the next generation of wireless technology. Moreover, it was worried that Broadcom would focus primarily on short-term profitability and therefore hinder Qualcomm as a leading innovator in 5G in the long-term.
The second concern was Broadcom’s efforts to expedite its redomiciliation to the U.S. Such move would take the jurisdiction away from CFIUS as Broadcom would no longer be considered a foreign company. If this was the case, CFIUS could look at it retroactively as a move to evade CFIUS. However, there is little precedent for it right now.
CFIUS reported multiple risks: a risk associated with third-party foreign entities, such as China, and a risk to the national security. Mr. Trump, the president of the United States, issued an executive order to prohibit the acquisition on the basis of CFIUS report, stating it threatens national security.
One of the key concerns CFIUS laid out about the Qualcomm bid was “...relationships with third party foreign entities and the national security effects of Broadcom’s business intentions with respect to Qualcomm....”
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