Broad­com’s huge breakup pledge looks like hubris

The Globe and Mail (Prairie Edition) - - REPORT ON BUSINESS | OPINION & ANALYSIS - BROOKE SUTHER­LAND

Bloomberg Gad­fly colum­nist cover­ing deals and in­dus­trial com­pa­nies who pre­vi­ously wrote an M&A col­umn for Bloomberg News

Broad­com Ltd. chief ex­ec­u­tive Hock Tan is bet­ting big on win­ning an­titrust ap­proval for his pro­posed US$100-bil­lion-plus takeover of Qual­comm Inc. But other CEOs have been con­fi­dent, too.

Qual­comm last week re­jected Broad­com’s sweet­ened bid of US$82 a share on the grounds that it un­der­val­ued the com­pany and fell short of nec­es­sary reg­u­la­tory com­mit­ments. The two sides were set to meet on Wed­nes­day to dis­cuss the pro­posal. Broad­com has in­sisted US$82 is its best and fi­nal of­fer, but com­mit­ted to a so-called tick­ing fee that would add about 30 US cents a share to the cash por­tion of the pro­posal for ev­ery month the merger-ap­proval process drags on be­yond a year.

The chip maker also agreed to pay Qual­comm a whop­ping US$8-bil­lion breakup fee should reg­u­la­tors block the deal. Asked about the reg­u­la­tory risk of such a mam­moth semi-con­duc­tor deal after years of con­sol­i­da­tion in the in­dus­try, Mr. Tan told CNBC, “I’m kind of a fru­gal guy. You think I would sign up to pay [US]$8-bil­lion if there’s even a sec­ond thought?” As jaw-drop­ping as it sounds, a re­verse breakup fee of that mag­ni­tude isn’t un­prece­dented and it’s ar­guably jus­ti­fied in this case. Broad­com and Qual­comm over­lap on sales of WiFi net­work­ing and ra­dio-fre­quency chips and have dis­agreed on how fix­able that is with di­vesti­tures. Of big­ger con­cern is po­ten­tial push­back from Euro­pean Union or Chi­nese reg­u­la­tors about the im­pact on in­no­va­tion and the com­bined com­pany’s abil­ity to dom­i­nate too much of the over­all mar­ket. At the very least, reg­u­la­tors seem likely to de­mand con­duct re­stric­tions – per­haps oner­ous ones.

Broad­com’s US$8-bil­lion pledge would be the sec­ond­high­est re­verse ter­mi­na­tion fee among deals tracked by Bloomberg. The big­gest was Ver­i­zon Com­mu­ni­ca­tions Inc.’s prom­ise to pay US$10-bil­lion to Voda­fone Group PLC if it failed to se­cure fi­nanc­ing for a US$130-bil­lion buy­out of the com­pa­nies’ Ver­i­zon Wire­less ven­ture. Broad­com finds even more com­pany when the breakup fee is an­a­lyzed rel­a­tive to the size of the Qual­comm trans­ac­tion.

Most trans­ac­tions with com­pa­ra­bly large breakup fees did even­tu­ally get done. But there are few no­table ex­cep­tions. AT&T Inc. fa­mously had to pay US$3-bil­lion after its pro­posed US$39-bil­lion takeover of T-Mo­bile USA col­lapsed un­der scru­tiny from reg­u­la­tors. Hal­libur­ton Co. was so sure an­titrust reg­u­la­tors would ap­prove its pur­chase of Baker Hughes Inc. that the com­pany agreed to pay the tar­get US$3.5-bil­lion – more than 9 per cent of the ini­tial US$38-bil­lion pur­chase price – in the event they blocked the deal. Here’s what Hal­libur­ton thenCEO David Le­sar said about the Baker Hughes deal when it was an­nounced.

“We have the best an­titrust coun­sel avail­able on this, and we clearly would not have done this deal if we didn’t be­lieve it was achiev­able from a reg­u­la­tory stand­point.” Sound fa­mil­iar, Mr. Tan? Hal­libur­ton, of course, was barred from ac­quir­ing Baker Hughes, which later merged with Gen­eral Elec­tric Co.’s en­ergy unit.

The an­titrust hur­dles in a Qual­comm-Broad­com merger aren’t di­rectly com­pa­ra­ble. They are quite real, though, and the sheer size of the breakup fee is no guar­an­tee of suc­cess. Broad­com can be as con­fi­dent as it wants about an­titrust ap­proval, but the risk of hav­ing to ac­tu­ally pay out that US$8-bil­lion breakup fee will likely weigh on its own shares.

The process seems un­likely to be as smooth as Broad­com wants it to be. For US$5-bil­lion­plus deals an­nounced be­tween two semi-con­duc­tor com­pa­nies over the past five years, the av­er­age time from an­nounce­ment to com­ple­tion or ter­mi­na­tion (es­ti­mated in the case of pend­ing deals) is 308 days, ac­cord­ing to data com­piled by Bloomberg. None of those trans­ac­tions are as large as what Broad­com is propos­ing with Qual­comm.

The point be­ing, some­times a bold ges­ture can come back to bite.

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