Qualcomm may blink first in staredown with Broadcom

Qualcomm Inc. is trying to call Broadcom Ltd.’s bluff, but the company may end up with its own credibility crisis.
Qualcomm’s board rejected Broadcom’s latest $82 cash-and-stock bid, saying it materially undervalued the company. The chipmaker is, however, finally willing to meet with Broadcom to determine “the true highest price at which you would be prepared to acquire Qualcomm” and to get firmer regulatory commitments. Broadcom responded by reminding Qualcomm it has already submitted its “best and final” offer, and threw shade at its would-be target for putting off a meeting until Tuesday, after each side meets with proxy advisory firms over Broadcom’s push to replace Qualcomm’s board.
Clearly, these are the words of two companies that are ready to be best friends. To its credit, Qualcomm does seem at least to be trying to start up a negotiation. But it’s rather hypocritical to justify a meeting now on the grounds that “the board is committed to exploring all options for maximizing shareholder value” after same board refused to meet when offer on the table was $70.
If Qualcomm had started talks earlier, perhaps it would have had more leeway to push for a higher price. The way things stand now, that will be challenging. Broadcom CEO Hock Tan is known for disciplined dealmaking; raising his bid for Qualcomm yet again risks throwing the deal — as well as his reputation — off balance. Broadcom shares have fallen more than 10 percent since its pursuit of Qualcomm was reported, well outpacing the decline in the Philadelphia Stock Exchange Semiconductor Index. It’s not that shareholders don’t like the deal — most do, and they think their company can do a much better job running Qualcomm. But they also believe Tan when he says $82 is best and final, and they take that as a sign he won’t overpay. Already, the move from $70 to $82 has amplified the amount of costs Tan has to cut and will force Broadcom to make billions in divestitures to preserve its investment-grade credit rating, says Bloomberg Intelligence analyst Anand Srinivasan.
One of those businesses might be Qualcomm’s licensing segment, which could fetch about $38 billion including the associated intellectual property, estimates Srinivasan. Broadcom reportedly is already planning to wind that down over time. Considering that business makes up a hefty chunk of Qualcomm’s pretax profit, the resulting margin pressure will require steep cost cuts at the remaining business.
And that’s really the crux of Qualcomm and Broadcom’s disagreement on price. Qualcomm wants Broadcom to pay for things the acquirer doesn’t necessarily want, like restoration of status quo in Qualcomm’s licensing business and the completion of its troubled acquisition of NXP Semiconductors NV. The problem for Qualcomm’s management team is that its own shareholders don’t necessarily place a lot of value on those things either at this point. Qualcomm has been fighting a never-ending war over its licensing business culminating in this
latest nasty legal spat with Apple Inc.
Qualcomm could come out after the meeting with Broadcom and say its commitment to an $8 billion reverse breakup fee and a ticking fee that boosts the cash payout if the regulatory process drags on beyond a year satisfies some of its antitrust concerns. But that still leaves the question of a bid that “materially undervalues” the company, a statement Qualcomm’s board can’t take back. Qualcomm shareholders will have their say on March 6 when they choose between Broadcom’s slate and the existing board. Odds are they feel differently.

—Bloomberg