Broadcom Corporation’s American dream date

Well, that didn’t take long. Broadcom Ltd. is exploring a $100 billion-plus takeover of chipmaker Qualcomm Inc., Bloomberg News reported. This is the same Broadcom that announced its decision to move its legal headquarters to the US in an Oval Office presentation that carried the usual bravado of President Donald Trump’s administration. We wondered then if this sudden bout of American patriotism was really about smoothing the path to approval for Broadcom’s $5.9 billion takeover of Brocade Communications Systems Inc. and future deals it might contemplate as one of the semiconductor industry’s most
active acquirers.
With Broadcom CEO Hock Tan’s hand barely out of President Trump’s grip, it’s now clear M&A was certainly on his mind. Merging with Qualcomm won’t be an easy feat, but it’s certainly easier if Broadcom is also a US company. There’s no way regulators would have allowed such a beacon of American semiconductor prowess to pass into the hands of a Singapore-based company that gets half its sales from China.
As far as targets go, Qualcomm is a bit of a surprising one. Until shares jumped Friday after the Bloomberg News story, about $16 billion of Qualcomm’s market value had been wiped out since the beginning of the year as it contends with a bitter legal fight with Apple Inc. and scrutiny from government agencies around the world. The decline makes Qualcomm look like a nice bargain for Broadcom. It’s reportedly offering $70 a share in a mix of stock and cash, or about $103 billion not including debt. That represents a 22 percent premium to Qualcomm’s closing price on Thursday, but it’s basically equal to what the company commanded in the market last December.
On the other hand, Apple’s lawsuit and the numerous antitrust investigations also threaten the fundamental underpinning of Qualcomm’s business. Qualcomm makes the majority of its operating profit from the fees it charges for proprietary technology, and companies pay this Qualcomm tax whether or not they use the chipmaker’s products.
Apple has attacked this aspect of Qualcomm’s business. It’s also now reportedly contemplating designs for next year’s iPhone and iPad models that don’t use the chipmaker’s components. And if Apple’s legal fight is successful, Qualcomm could be significantly less valuable in the future. That’s the risk Broadcom would be taking.
Qualcomm is also still trying to complete its $40 billion-plus takeover of NXP Semiconductors NV. It’s not clear if Broadcom would want to see that merger get done before it bids on Qualcomm or if it is proposing an alternative to that deal. NXP investors, including Elliott Management Corp., have criticized the deal as undervaluing the target company. As of October 19, just 3.6 percent of NXP holders had tendered their shares.
Elliott reportedly wanted NXP to renegotiate with Qualcomm, remain a stand-alone company or find another buyer — basically any option except the current deal. Now it might get its wish. For what it’s worth, NXP dropped more than 5 percent on this news.
Broadcom isn’t even a US citizen yet but it’s already mastered the American art of supersizing things.

—Bloomberg