Broadcom, a leading semiconductor device supplier submitted an unsolicited offer to acquire all outstanding shares of Qualcomm for $70 per share ($60 per share in cash and $10 in Broadcom stock) for a total of $103 Bn (incl. outstanding debt) in ambition to create the third-largest chipmaker, behind Samsung and Intel. The offer represents a premium of nearly 28% to Qualcomm’s last closing price of $54.85 before the announcement.
With its bid, Broadcom seeks to take advantage of Qualcomm’s low valuation. Qualcomm ran into a number of difficulties in the past year, including the ongoing lengthy acquisition of NXP, [what is NXP], a licensing dispute with one of its largest customers, Apple, and numerous inquiries and lawsuits from regulators. These difficulties negatively impacted the stock price and the positioning of Qualcomm vis-a-vis competitors and customers.
Broadcom’s product portfolio has some significant overlaps with Qualcomm in wireless communications, which is bound to result in product synergies. Qualcomm is the world’s largest supplier of modems (and well positioned to lead the transition to 5G networks) while Broadcom is the top supplier of Wi-Fi and Bluetooth chips for mobile devices and a major supplier of components for high-end smartphones, including NFC (Near Field Communication) and wireless charging chips. The combined entity would become the dominant supplier of chips for smartphones, and with the industry consolidating, Broadcom seeks to enhance its negotiating position with OEMs.
In addition, Broadcom is known for its cost-cutting capabilities. Overlapping R&D and administrative functions could pave the way for significant cost reductions and synergies for the combined entity and improve Qualcomm’s declining margins.
Later in November, Qualcomm officially rejected Broadcom’s acquisition offer. The company said the offer substantially undervalues Qualcomm and also that such a merger would be burdened with significant regulatory uncertainties. Despite the challenges faced by Qualcomm, the company’s management believes it would create more value for shareholders as a separate entity. Broadcom’s Hock Tan, however, is determined to complete the deal and plans to engage in a proxy fight.
