Broadcom ready to go hostile for US$105B Qualcomm acquisition

SAN FRANCISCO Broadcom Ltd. chief executive officer Hock Tan is gearing up for what could be a lengthy and bruising hostile takeover battle to clinch his US$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 US$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 mobilephone chips, Broadcom would pay a 28-per-cent 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 US$130 billion, including US$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 thirdlargest 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 US$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 US$4.9 billion Parnassus Endeavor Fund, said US$70 a share for the firm is “dirt cheap.” He said US$90 to US$100 is closer to where it should be. Qualcomm’s value is in its intellectual property and the patents it holds, he said.

Tan, president and chief executive 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.

“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.