The chips are down in bat­tle for mo­bile prof­its

Broad­com’s re­jected $130bn bid for Qual­comm re­flects in­tense competition amid shrink­ing mar­gins, re­ports James Tit­comb

The Daily Telegraph - Business - - Business -

ual­comm’s chief ex­ec­u­tive Steve Mol­lenkopf isn’t used to be­ing the un­der­dog. The Amer­i­can mi­crochip gi­ant has been a key player in the world of semi­con­duc­tors for the last two and a half decades, de­sign­ing the tech­nol­ogy for dig­i­tal mo­bile net­works in the early Nineties, and prof­it­ing hand­somely from the lu­cra­tive roy­al­ties it re­ceives on every mo­bile.

On top of this, it makes the pro­ces­sors used in many of the world’s mo­biles, a po­si­tion that has served it ex­traor­di­nar­ily well over the smart­phone ex­plo­sion of the last decade. But over the last year, Mol­lenkopf could be for­given for feel­ing a lit­tle bullied.

In Jan­uary, Amer­ica’s Fed­eral Trade Com­mis­sion charged the com­pany with ex­ploit­ing the mo­nop­oly it has over phone modems to squeeze cus­tomers. Days later, Ap­ple fol­lowed, with the world’s most valu­able com­pany cut­ting off roy­alty pay­ments to Qual­comm and su­ing it for over­charg­ing cus­tomers.

Over the sum­mer, the Euro­pean Com­mis­sion launched a full in­ves­ti­ga­tion into its $47bn (£36bn) takeover of NXP Semi­con­duc­tors, im­per­illing the big­gest deal in its his­tory. And last week, Qual­comm found it­self the sub­ject of an un­wanted $130bn takeover bid from Broad­com, one of the few chip mak­ers big enough to swal­low it. The deal would be the big­gest in tech his­tory.

Qual­comm re­jected the deal yes­ter­day, say­ing it “dra­mat­i­cally un­der­val­ues” the com­pany. Broad­com is ex­pected to re­turn with a new bid, or po­ten­tially go hos­tile, a fur­ther un­wel­come dis­trac­tion. The com­pany’s tu­mul­tuous year may look like a run of bad luck, but it also il­lus­trates a wider upheaval in the colos­sal semi­con­duc­tor mar­ket Qual­comm in­hab­its.

Semi­con­duc­tors – the sil­i­con com­po­nents that cre­ate the mi­cro­pro­ces­sors and tran­sis­tors at the heart of all elec­tron­ics – are ex­pected to be a $411bn mar­ket this year, up 19.7pc from 2016. The pro­lif­er­a­tion of smart­phones, modems and com­put­ers into our lives, as well as higher num­bers of servers, data cen­tres and man­u­fac­tur­ing ro­bots in the com­mer­cial world, has meant ev­er­grow­ing de­mand for mi­crochips and mem­ory – the brains that power them.

The rise of con­nected cars and the “in­ter­net of things” – ob­jects in homes and fac­to­ries com­ing on­line – should only in­crease this. But while it might seem that this can only ever be a good thing, there is as much fear as there is op­por­tu­nity. Smart­phone sales – the chip mar­ket that has been so lu­cra­tive for many – have slowed down in re­cent years, and the prof­itable high end of the mar­ket has be­come dom­i­nated by Sam­sung and Ap­ple, giv­ing the two gi­ants more lever­age over their sup­pli­ers.

“A lot of the mar­kets that have driven growth are con­sol­i­dat­ing,” says Stu­art Car­law of ABI Re­search. “There’s a mas­sive amount of power in a small num­ber of hands, so mar­gins are go­ing down.” As the smart­phone mar­ket cools, the things that are re­plac­ing it, such as con­nected cars and the in­ter­net of things, of­fer im­mense scale but not the same prof­its. Whereas a phone might con­tain hun­dreds of pounds of elec­tron­ics, con­nected ma­chines can have less than £10. “Even if we’re gen­er­at­ing far more types of ma­chine, the growth pro­file still isn’t break­ing even,” says Car­law. This change does, how­ever, re­quire huge in­vest­ments from the semi­con­duc­tor firms, which not only have to cal­i­brate them­selves to new in­dus­tries but also cre­ate ever more in­tri­cate de­signs.

Moore’s Law – the idea that the num­ber of tran­sis­tors one can fit in a cir­cuit (which roughly equates to com­put­ing power) dou­bles every year – has been ac­cu­rate for half a cen­tury, but has re­quired bal­loon­ing re­search and de­vel­op­ment bud­gets to main­tain, the type of bud­gets that ex­ist only in mega com­pa­nies.

This partly ex­plains the wave of con­sol­i­da­tion that has swept through the in­dus­try in re­cent years, of which Broad­com’s Qual­comm of­fer is merely the lat­est and big­gest. The com­pany’s own $47bn of­fer for NXP last year, which is cur­rently be­ing held up by the Euro­pean Com­mis­sion, was typ­i­cal of the shift into new mar­kets, with Qual­comm seek­ing to re­duce its re­liance on smart­phones and break into NXP’s con­nected car mar­ket.

New cap­i­tal has also swept into the in­dus­try, most no­tably in the case of ARM Hold­ings, the Cam­bridge-based com­pany whose chip ar­chi­tec­ture pow­ers al­most every smart­phone in the world. ARM was not bought by an­other chip maker, but by Ja­pan’s SoftBank, which paid £24bn for the com­pany last year.

China, which sees ex­per­tise in semi­con­duc­tors as cru­cial, has plunged bil­lions into catch­ing up to other coun­tries. A state-backed at­tempt by pri­vate eq­uity firm Canyon Bridge to buy US firm Lat­tice Semi­con­duc­tor failed, but it suc­ceeded in re­cently tak­ing over the UK’s Imag­i­na­tion Tech­nolo­gies.

But Broad­com, Qual­comm’s suitor, has been among the big­gest buy­ers of all. Spun off from Hewlett Packard in 1999, Avago Tech­nolo­gies, as it was then known, was worth less than $5bn

‘There’s a mas­sive amount of power in a small num­ber of hands, so mar­gins are go­ing down’

when it went pub­lic in 2009, but has be­come a $109bn be­he­moth through a string of deals mas­ter­minded by its chief ex­ec­u­tive Hock Tan. When it paid $37bn for Broad­com, which makes ra­dios for phones and other elec­tron­ics, in 2015, it also adopted the name. Just days be­fore its $130bn Qual­comm of­fer be­came pub­lic, Tan vis­ited the Oval Of­fice to an­nounce that Broad­com’s le­gal base would move from Sin­ga­pore to the US, a move that many see as an at­tempt to win reg­u­la­tory sup­port for the deal.

It still may not win it. Thomas Vinje, the head of an­titrust at law firm Clif­ford Chance, says Qual­comm may seek to have any hos­tile takeover blocked by competition reg­u­la­tors, and that it may have a good chance. “If one looks at the in­ter­est the Euro­pean Com­mis­sion has shown in the deal with NCP, it in­di­cates pretty clearly this broader deal be­tween Broad­com and Qual­comm would at­tract in-depth scru­tiny,” he says.

So if mi­crochip merg­ers are now get­ting too big to be al­lowed, could this be the end of the great deal mak­ing boom? ABI’s Stu­art Car­low thinks not, say­ing that tech gi­ants like Google and Ap­ple could sim­ply turn into the ac­quir­ers. It seems that when it comes to chips, there is al­most al­ways a big­ger fish.

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