World’s largest technology deal hinges on Qualcomm

Bloomberg

Broadcom Ltd.’s bid for Qualcomm Inc. is a good place to start negotiations between the two companies on what would be the biggest deal in the history of technology, according to Institutional Shareholder Services Inc.
The influential proxy adviser, though, stopped short of recommending that Qualcomm shareholders vote for the current offer of $82 a share, in a report. It advocated voting for four of the six board nominees Broadcom has put forward, two fewer than the full slate that would give the hostile bidder’s representatives a majority with which to overturn Qualcomm’s resistance to the takeover.
The ISS report will put more pressure on Qualcomm’s leadership to give into Broadcom’s demands to engage on a deal to create a chipmaking juggernaut. Qualcomm has dismissed the $121 billion offer so far, saying it’s too low and would struggle to pass regulatory scrutiny. The San Diego-based company has instead talked up its prospects as a standalone company. ISS poured cold water on that notion.
“Qualcomm’s optimistic vision of the future would likely resonate more effectively among shareholders if the company’s track record was more like that of its would-be acquirer,” ISS wrote in the report. “Broadcom’s offer appears to be a good starting point for negotiations, though steps could be taken to increase its certainty — or at least provide Qualcomm and its shareholders with a better safety net should a deal not eventually close.”
Qualcomm shareholders are scheduled to vote on the slate of Broadcom nominees on March 6. Qualcomm’s board said discussions with Broadcom failed to persuade directors to sign off on the deal but left open the door to further discussions. Company representatives didn’t immediately have a comment.
“The board remains unanimously of the view that this proposal materially undervalues Qualcomm and has an unacceptably high level of risk, and therefore is not in the best interests of Qualcomm stockholders,” Qualcomm said in a letter to Broadcom.
Broadcom isn’t commenting publicly because it would prefer to hold friendly negotiations with Qualcomm, said a person familiar with the company’s plans. Broadcom is willing to be flexible on elements of the deal, such as the ratio of stock and cash, but will stick to the offer price of $82 a share, said the person, who asked not to be identified.
Aside from the offer price, Qualcomm’s reservations have hinged on antitrust issues. It has argued that regulatory approval around the world would take more than a year, leaving the company in limbo without expert leadership. Qualcomm also dismissed Broadcom’s offer of an $8 billion breakup fee if the deal fails. The payment “does not come close” to compensating shareholders for the risk of a botched deal, Qualcomm said.
The recommendation from ISS gives Broadcom Chief Executive Officer Hock Tan more ammunition to gather support for his assertion that he has a better idea of how to run a chip company than Qualcomm’s current team does. Tan has had a series of victories as he’s built one of the largest companies in the industry through a string of takeovers. Investors have rewarded his ability to rapidly combine acquired companies and squeeze out more profit. His strategy is based on the belief that chip industry growth has slowed, and therefore spending needs to be focused and restrained. Meanwhile, Qualcomm’s management has stuck to its strategy — one that was once pervasive in the $380 billion industry — that success is tied to investing heavily and working to expand into new areas.
Investors have rewarded Broadcom’s strategy, which has generated substantial revenue and profit growth, with a stock that’s now trading at close to $250, an almost fivefold advance from where it was before Tan began his deal spree.
For the Qualcomm board, the decision to shun the offer will test shareholders’ faith in management to turn around a business that has struggled over the past two years.