Maker of chips pursues big deal
Broadcom faces rival’s resistance
Broadcom Ltd. Chief Executive Officer Hock Tan has had his own way over the past three years as the driving force in consolidating a $380 billion semiconductor industry. He’s about to face a much tougher crowd.
Tan is trying to engineer the largest takeover in the history of the technology industry, a
$121 billion bid for Qualcomm Inc. that’s been rejected on grounds it undervalues a wireless leader and pioneer.
While the target company has now agreed to meet to toss ideas around, Qualcomm CEO Steve Mollenkopf told employees the offer doesn’t mean a deal is on and reminded investors to vote against the bid at a pivotal March 6 shareholder meeting.
Tan, who has stressed that he would prefer a friendly approach, said Friday that Broadcom’s offer was final — squelching hope of a sweetener but also dangling the prospect of an $8 bil-
lion breakup fee. He’s taking a harsher line in an appeal to Qualcomm’s shareholders, ratcheting up his criticism of the company’s performance under current leadership.
Tan criticized Qualcomm’s response as foot-dragging and said he has spoken to its shareholders who want progress. Qualcomm is delaying the meeting until after the two sides meet with organizations that assess transactions, he said.
“I was astonished to hear that Qualcomm is not willing to meet until Tuesday,” Tan said in a letter to Qualcomm’s chairman, Paul Jacobs. After having met with most of Qualcomm’s largest stockholders this past week, Tan said he has “no doubt” that it’s their “strong desire as well” to reach an agreement.
Qualcomm’s board includes Jacobs — the son of the company’s founder — and Mollenkopf, both engineers committed to taking market-leading mobile chip technology into new areas such as servers, personal computers and automobiles. That’s in opposition to the worldview espoused by Tan, who has dismissed that type of expensive long-term
endeavor as fighting yesterday’s battles. He has argued that the industry has changed and such engineering-driven thinking is obsolete.
Tan’s forte is deal-making. Broadcom has grown through a string of acquisitions that he used to consolidate the strengths of companies acquired earlier, becoming one of the world’s largest suppliers of semiconductors along the way. He has delivered the kind of earnings growth that markets have loved by cutting costs and focusing his company on what it’s good at.
Now he’s trying to close the most important deal of his career. This week, Broadcom raised its proposed price to $82 a share, a deal that would take the form of $60 in cash and the remainder in Broadcom shares. That’s a bump of 17 percent from an opening offer in November of $70. Qualcomm’s board, however, isn’t budging.
“Your proposal is inferior relative to our prospects as an independent company and is significantly below both trading and transaction multiples in our sector,” Jacobs wrote in an open letter to Tan.
If Tan can’t make any headway face to face, Qualcomm’s second dismissal may put the decision in the hands of shareholders, who will vote in March on whether to replace
the smartphone chipmaker’s board with Broadcom nominees.
Tan wants Qualcomm for its leading smartphone modem-chip division, an example of what he calls a “franchise” that will continue to dominate its industry. Stock of his company — formerly called Avago Technologies — ended 2009 at $18.29. It closed Friday at $235.50.
Qualcomm’s contention that the chipmaker’s future is brighter as a stand-alone company has become a tougher sell, given multiple challenges that have cropped up in the past two years. The greatest center around its lucrative technology-licensing business.
Regulators around the world are fining or investigating Qualcomm, supporting elements of Apple Inc.’s claims in a lawsuit alleging Qualcomm abuses its dominant position in mobile chips. Qualcomm has countered that it expects to win in court over time and overturn some of the more than $4 billion it has been fined. Tan argues that unrealistic views led the company to an impasse with the iPhone maker.
“They don’t see the realworld side of it, the business side of it, which is why you get into a fight with your biggest customers,” he said in an interview
Monday. “Nobody fights with their biggest customer.”
Broadcom’s takeover attempt, however, is complicated by Qualcomm’s pending acquisition of NXP Semiconductors NV, meant to give it broader access to new markets. That $47 billion deal is close to securing final regulatory approval. Once that happens, Qualcomm will need to negotiate with a group of funds that have taken a position in the Dutch company’s stock, demanding an increase in the $110-a-share price agreed to by NXP’s board. Broadcom said its new offer for Qualcomm is contingent on that transaction either closing at the originally agreed price or being abandoned.
For Qualcomm, its licensing business remains central to both its profits and ability to stay ahead in mobile chip technology. Most of its profit comes from collecting fees for the use of patents that cover the fundamentals of all modern phone systems. That cash influx fuels industry-leading research and design, which in turn helps the chip unit build advanced products.
“Your proposal ascribes no value to our accretive NXP acquisition, no value for the expected resolution of our current licensing disputes and no value for the significant opportunity in 5G,” Jacobs wrote.