Broadcom Ltd. Chief Executive Officer Hock Tan is gearing up for what could be a lengthy and bruising hostile takeover battle to clinch his $105 billion offer for Qualcomm Inc., the largest-ever tech deal.
Broadcom, seeking to build a powerhouse that leads the market for chips that let electronic devices operate wirelessly, is prepared to launch a proxy battle should Qualcomm spurn the $70-a-share proposal outlined Monday, a person with knowledge of the matter said. Qualcomm is assessing the cash-and-stock proposal, but it's inclined to reject Broadcom's terms. Broadcom would then forge ahead with a direct appeal to Qualcomm shareholders, said the person, who asked to remain anonymous discussing private matters.
To acquire Qualcomm, the world's largest maker of mobile-phone chips, Broadcom would pay a 28 percent premium over the stock's closing price on Nov. 2, before Bloomberg first reported talks of a deal. The proposed transaction would be the largest so far this year, valued at approximately $130 billion, including $25 billion of net debt.
"We've provided a very compelling offer and strong rationale for the combination," Tan said in his first interview after the deal was made public. "It makes sense and it's very friendly I believe to all stakeholders, especially shareholders."
Buying Qualcomm would remake the chipmaking industry, transforming Broadcom into the third-largest chipmaker, behind Intel Corp. and Samsung Electronics Co. The combined business would instantly become the default provider of a set of components needed to build each of the more than a billion smartphones sold every year. The deal would dwarf Dell Inc.'s $67 billion acquisition of EMC in 2015 -- then the biggest in the technology industry.
"The combination of the two companies could generate strong synergies and create a dominant wireless business and overall powerful global semiconductor leader," said Mike Walkley, an analyst at Canaccord Genuity.
Qualcomm is preparing to fend off the unsolicited offer, arguing it undervalues the company, people familiar with the plans have said. Qualcomm will argue that the proposal is an opportunistic move to buy the chipmaker on the cheap, the people said, and it will likely recommend that shareholders reject it. In a statement Monday, Qualcomm said it would "assess the proposal in order to pursue the course of action that is in the best interests of Qualcomm shareholders."
Jerome Dodson, who holds 8.2 million Qualcomm shares in his $4.9 billion Parnassus Endeavor Fund, said $70 a share for the company is "dirt cheap." He said $90 to $100 is closer to where it should be, noting that Qualcomm's stock traded as high as $70 in the past year. Qualcomm's value is in its intellectual property and the patents it holds, he said.
Tan, president and chief executive officer of Broadcom, is making a play for Qualcomm as the once-unstoppable chipmaker limps through a rare moment of weakness. Qualcomm's most profitable unit, which licenses mobile phone technology, is under assault from regulatory actions around the world and a legal challenge from Apple Inc. The lawsuit may prompt Apple to stop buying Qualcomm chips for use in the iPhone and other products, which would deal a major blow to a unit that drives the bulk of Qualcomm's revenue. Meanwhile, Broadcom counts Apple among its largest customers.
The bid values Qualcomm at about 21.2 times earnings before interest, tax, depreciation and amortization, compared with a median multiple of 22.5 for similar deals in the industry, according to data compiled by Bloomberg.
"The ball is now in Qualcomm's court, with management now under pressure to convince shareholders why current management will be better at driving value than Broadcom," said Stacy Rasgon, an analyst at Sanford C. Bernstein & Co., in a note to investors. "We expect a considerable amount of back and forth from here, but believe a floor will be put under the shares at least."
Qualcomm shares rose 2.1 percent to $63.12 at 1:31 p.m. in New York Monday. It remains below the offer as investors weigh possible regulatory challenges and the prospect of opposition by Qualcomm. The stock closed up 13 percent on Friday at $61.84, valuing the company at $91 billion. Broadcom rose 5.5 percent Friday for a market value of $112 billion. Its shares declined less than 1 percent Monday to $271.89.
Wave of consolidation
Broadcom's Tan has played a pivotal role in a wave of consolidation engulfing the $300 billion semiconductor industry over the last three years. He took a former Hewlett-Packard division and built it into one of the largest chipmakers through a string of purchases. Tan established the current iteration of Broadcom in 2016 when his Singaporean company Avago Technologies Ltd. acquired U.S.-based Broadcom Corp. for $37 billion.
"This complementary transaction will position the combined company as a global communications leader with an impressive portfolio of technologies and products," Tan said in a statement Monday. "We would not make this offer if we were not confident that our common global customers would embrace the proposed combination.''
Tan, who holds degrees in mechanical engineering from the Massachusetts Institute of Technology and an MBA from Harvard Business School, laid the foundation for future dealmaking last week. In a widely broadcast announcement Thursday with U.S. President Donald Trump in the Oval Office, Tan said he will move Broadcom's headquarters to the U.S.
The move was largely symbolic: Broadcom already lists San Jose, California, as a corporate co-headquarters. But analysts said the domicile change would make it easier for Broadcom to launch deals from the U.S. and complete its $5.9 billion takeover of Brocade Communications Systems Inc. Announced last November, that transaction has been delayed at least three times by the Committee on Foreign Investment in the U.S., a panel that reviews the security risks of foreign acquisitions of American companies.
"The decision is rooted in the company's strategy to pursue M&A and in the political reality that it has become more difficult for overseas-based companies to acquire U.S. ones," said Mark Lipacis, an analyst at Jefferies & Co.
If Broadcom can pull off a deal, it could help smooth things over with Qualcomm's biggest adversary. A change of management at Qualcomm might help resolve the dispute with Apple more quickly, according to Sanford C. Bernstein's Rasgon.
At issue between the two companies are licensing fees the chipmaker charges for patents covering the basics of how mobile phone systems work. Apple contends Qualcomm is unfairly charging too much and illegally taking advantage of its market position in chips. To heighten pressure on Qualcomm, Apple has stopped paying the licensing fees and is planning to design devices that exclude Qualcomm's chips, a person familiar with the situation has said.
Qualcomm has countered that Apple, one of its largest customers, has lied to regulators in an unfair attempt to reduce fees it must pay. Qualcomm filed lawsuits seeking to ban the sale and manufacture of iPhones in China, which, if granted, would cut off Apple from the world's largest phone market and cripple production. Last week, Qualcomm executives said the legal process would "proceed under the court's schedule," indicating no resolution soon.
Whatever the outcome of the Apple dispute, San Diego-based Qualcomm must confront challenges with closing its $47 billion purchase of NXP Semiconductors NV. The deal is facing regulatory scrutiny in Europe and opposition from some NXP shareholders, including activist hedge fund Elliott Management Corp., which has argued the offer undervalues NXP.
Time with Trump
In the statement Monday, Broadcom said its offer stands whether Qualcomm's pending acquisition of NXP is closed under the current terms of $110 per NXP share, or if the transaction is terminated.
Like Tan, Qualcomm CEO Steve Mollenkopf is spending time with the Trump administration. Mollenkopf is taking part in the president's trade mission to China later this month, according to a company spokeswoman.
Despite both chiefs' political maneuvering, a Broadcom-Qualcomm tie-up may face intense regulatory scrutiny. The two companies are independently among the top 10 providers of chips in an industry that's consolidating rapidly. Together, they would have tight control of the supply chain for Wi-Fi and cellular modem chips, vital components in making phones.
Morgan Stanley is among banks advising Broadcom, alongside Moelis & Co., Citigroup Inc., Deutsche Bank AG, JPMorgan Chase & Co. and Bank of America Corp. Qualcomm is working with Goldman Sachs Group Inc. and Evercore Inc., according to people familiar with the matter.