On Monday Broadcom’s proposal to purchase Qualcomm for $70 per share was rejected by Qualcomm’s Board of Directors a week after the offer was officially announced. The deal could have potentially created a semiconductor company with revenues of about $51 billion, according to Broadcom’s presentation to investors. Broadcom management stated that the company’s unsolicited offer represented a 28% premium to Qualcomm’s average stock price over the 30 days prior to media speculation about the deal. However, in Qualcomm’s press release rejecting the offer, Executive Chairman and Chairman of the Board of Qualcomm, Paul Jacobs stated that “Broadcom’s proposal significantly undervalues Qualcomm relative to the company’s leadership position in mobile technology and our future growth prospects”. The decision by Qualcomm’s Board of Directors is no surprise. Besides the perceived under-valuation, a combination with Broadcom may face regulatory difficulties, despite Broadcom recently announcing the formal (legal) moving of its headquarters from Singapore to the United States.
Broadcom is highly adept at acquisitions, since its IPO in 2009, the company has completed several high-profile acquisitions, including the purchase of Broadcom for $37 billion, the largest acquisition in semiconductor industry history at the time of its close, overshadowed only by Qualcomm’s pending acquisition of NXP. There are several characteristics that Broadcom management tends to look for in products or business that they acquire. Management wants to participate in markets where growth is consistent and with clear visibility into where these markets are headed. They also prefer to focus on acquiring products or businesses which have leadership positions in their respective markets.
Broadcom’s presentation to investors specifically highlighted Qualcomm’s cellular connectivity business as well as the automotive semiconductor and microcontrollers (MCUs) from the NXP. Although Broadcom added NXPs MCUs and automotive semiconductor businesses to a hypothetical Industrial and Auto segment in their presentation, interestingly their offer stood regardless of whether Qualcomm closed the NXP acquisition or it was terminated. The close of the NXP transaction should be of keen interest to Broadcom, given their aforementioned preference in acquiring businesses with leadership positions. According to the IHS Markit Competitive Landscaping Tool, NXP is currently the leader of the overall Automotive semiconductor market by revenue, generating almost $4.2 billion in 2016 and projected to grow 5.5% in 2017, which is above Broadcom’s stated long-term top-line revenue growth goal of 5%. In whole, the NXP MCU business is the second largest in the overall MCU market segment as well.
Qualcomm announced its intent to acquire NXP for $110 a share last October; the acquisition would help diversify Qualcomm’s addressable application markets and expand its product portfolio. The company anticipated that the acquisition would add $38 billion to its serviceable addressable market (SAM) by 2020 with the total SAM of the combined entity at about $138 by that time. Qualcomm’s management initially anticipated the NXP deal to close by the end of the 2017 calendar year. However, on the most recent quarterly earnings call management signaled that the deal could slip into the calendar year 2018 due to the pending regulatory approvals.
The rejection of Broadcom’s acquisition offer by Qualcomm’s board may not be the end of this matter. With Broadcom’s disclosures including its presentation to investors detailing the benefits of the deal, certain aspects of its strategy have been publicly revealed. Broadcom could come back with a higher offer or walk away from the table. Even if they decide to balk after showing their cards, the offer could put pressure on Qualcomm’s management as shareholders compare the two companies’ performance going forward. However, if Broadcom’s current offer does end here, the competition between the two companies has just escalated to the next level as Qualcomm looks to prove Broadcom undervalued the company going forward.