Largest Possible Tech Deal in History Leaves Investors Buzzing

By Chirag Gandhi

Broadcom (AVGO) and Qualcomm (QCOM) are not household names in the U.S. tech sector. Yet, as rumours of a $103 Billion USD unsolicited bid by Broadcom to take over Qualcomm mount, investors are scrambling to understand the impacts on the tech sector.

Qualcomm Inc under shareholder pressure as market conflicts emerge

Qualcomm has been vulnerable to a takeover as its shares have faltered under pressure from a patent battle with Apple (AAPL).  Qualcomm and Apple have been in a long dispute over royalty payments and Apple has called for an investigation regarding Qualcomm’s business practices. In addition, there are concerns that Qualcomm’s recent $38 Billion USD bid to acquire NXP Semiconductors NV (NXPI) may not be enough to finalize the deal. Hence, their share price has dropped from  $66 USD in January to a 52-week low of $50 USD in September 2017. Finally, investors have noted that Qualcomm’s entire 10-member board of directors is up for re-election within the next couple of months, allowing the opportunity for Broadcom to nominate its own members to help facilitate the takeover.  The cumulative effects of these events over the past year have opened the door for competitors to acquire Qualcomm.

A Friendly Deal for All Parties Involved?

In 2016, Broadcom approached Qualcomm to discuss a potential acquisition, but both sides were unable to agree on the terms.  Broadcom has confidently stated that they can arrange the necessary financing to acquire Qualcomm. However, Qualcomm’s management firmly believes that the company is worth more than is being offered. The latest unsolicited bid includes $60 USD in cash and $10 USD per share in Broadcom, for a total deal worth 103 billion USD. Still, Egil Juliussen, a principal analyst in the sector, believes that Qualcomm shares can fetch  $75-80 USD, with some negotiation, as the shares have topped $80 USD in 2014. The rumours of an unsolicited bid, however, may be a pressure tactic used by Broadcom to bring Qualcomm’s management back to the negotiating table.

Broadcom the Market Leader Communication Chips?

If Broadcom can pull off the largest tech deal in history by acquiring Qualcomm, it could set them up to battle with Intel Corp (INTC) for next generation communication chips. In spite of its legal dispute with Apple, Qualcomm supplies half of the iPhone’s communication chips. Moreover, the market is tending towards 5G which is predicted to be over 10 times faster than current wireless networks. As the market for modem chips in cars and drones is expected to increase significantly, Qualcomm is set to take advantage of these new market trends. Hence, it is no surprise that Broadcom wants to acquire Qualcomm in order to become the leader in high-end component chips and control the 5G chips market.

The Bottom Line

Broadcom’s rumoured  $103 Billion USD offer for Qualcomm, representing a 28% premium, is expected to face many obstacles. The Chinese government is not expected to provide regulatory approval of the deal as U.S regulators have previously blocked acquisitions by Chinese firms citing security concerns. Moreover, Qualcomm shareholders have been hesitant to accept the terms of the deal, as they believe that they deserve a higher premium. Yet Broadcom views Qualcomm as a vulnerable target, struggling due to its legal problems with Apple and its inability to finalize the acquisition of NXP semiconductors NV. Qualcomm’s acquisition would allow the company to become a dominant supplier for electrical chips used in the production of an estimated 1.5 billion smartphones per year. Although the deal seems questionable, it is safe to say that Broadcom will continue to press Qualcomm shareholders in the hopes of establishing major market dominance in an ever-growing industry.

Editor’s Note: As of November 13th, Qualcomm shareholders rejected Broadcom’s unsolicited bid, saying it undervalued the company. However, talks between the two companies should continue as Broadcom has demonstrated unfaltering interest.