Broadcom’s huge breakup pledge looks like hubris
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.