Just days after announcing it would move its offices from Singapore to the U.S., Broadcom Ltd (NASDAQ:AVGO) is launching its biggest acquisition effort, offering to buy Qualcomm, Inc. (NASDAQ:QCOM) for $70 per share, about $103 billion. It’s not a coincidence.
From its Singapore base, the company formerly known as Avago Technologies found its effort to buy Brocade Communications Systems Inc. (NASDAQ:BRCD) last year slowed by a U.S. review covering the sale of key technology to foreign entities, known as the Committee on Foreign Investment in the United States, or CFIUS.
Now, with an appearance in the Oval Office by Malaysian-born CEO Hock Tan, that may no longer be a problem. The same would be true of a Qualcomm deal.
Big Win for Apple?
Qualcomm had become a bargain, falling 7% in value during a year where every other Big Tech name was rising sharply, because of its long-standing dispute with Apple Inc. (NASDAQ:AAPL) over chip royalties.
Apple is demanding discounts on intellectual property royalties, which Qualcomm charges for its patents even if a company buys chips elsewhere. Under CEO Steve Mollenkopf, Qualcomm has gone to war. Apple has responded in kind and the reputation of both sides has been bloodied.
Tan is likely to end the conflict, doubtless on better terms than Mollenkopf is currently offering. There is also the question of what now happens with Qualcomm’s ongoing effort to buy NXP Semiconductors Inc. (NASDAQ:NXPI), which has stalled as investors like Elliot Management seek a higher price.
Broadcom has said its offer stands whether the NXP deal is completed at the current price of $110 per NXP share, or not. In other words, take it or leave it.
Broadcom is already a major Apple supplier, and if Tan, a hero in his native Malaysia, can broker a peace deal he could slow Apple’s ongoing efforts to seek other suppliers for its modem chips, such as Intel Corp. (NASDAQ:INTC).
Skepticism Continues
Investors have yet to grab the premium in Qualcomm that Broadcom is offering as trading opened on Nov. 6, with Qualcomm opening at less than $65 per share, against a deal value of $70 per share.
One reason for that is that $10 per share of the price being offered represents Broadcom stock, and the deal would be partly funded by $30 billion in new debt, increasing Broadcom’s debt-to-assets ratio. Another reason is that the deal could still take 18 months to clear through global antitrust regulators.
As this was written, Qualcomm was still evaluating the deal but it is expected to reject the current price. Some analysts believe Qualcomm could fetch $85 per share in a bidding war, but that would require a second bidder.
While the deal might end the Apple litigation, a Broadcom-Qualcomm deal would put together two companies who fought one of the biggest legal wars of the past decade, during which Qualcomm’s lawyers were charged with serious ethical violations.
There are a lot of moving parts in this story, but the picture of Trump hugging Tan is the one that endures. If completed, this would be the largest pure technology merger of all time, and while the company’s headquarters may remain American, its head will be in the Far East.
The Bottom Line
The merger is going to take time to play out. Broadcom is already a major supplier to Apple, and Apple’s view on this deal may be the key to whether it takes place.
My guess is that if Apple makes some move approving the deal, through a negotiation with Broadcom management, it’s very likely to go through. You don’t argue with companies whose market cap is $900 billion. Or with the President of the United States.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned no shares in companies mentioned in this article.
