Qualcomm rejects Broadcom takeover offer

Proposal undervalues company, board says

SAN DIEGO — Qualcomm has rejected Broadcom’s latest $121 billion takeover offer but said it is prepared to sit down with Chief Executive Hock Tan to discuss the proposal.

In a letter to Tan on Thursday, Qualcomm Executive Chairman

Paul Jacobs said the company’s board of directors believes the latest $82 per share offer “materially undervalues Qualcomm and falls well short of the firm regulatory commitment the board would demand given the significant downside risk of a failed transaction.”

But Qualcomm’s board is prepared to meet with Tan so he can explain how he would attempt to bridge the gaps in value, deal certainty and other issues.

The move is the first time Qualcomm has said it would sit down with Tan after he began pursuing an acquisition of Qualcomm in November.

“I am surprised that Qualcomm opened the door at all. Maybe they felt they had no choice at this point,” said Steven Re, president of Fairbanks Capital Management, a longtime owner of Qualcomm stock.

“Shareholders should be angry if there is an $82 offer out there and it’s totally refused without even letting Hock Tan talk to them,” said Re. “The stock is trading at $63. That is a huge spread, and institutional shareholders are not going to take that lightly.”

Tan has repeatedly called for Qualcomm’s board to open a dialogue, which the San Diego company had refused to do until now.

Tan responded late Thursday that he was willing to meet this weekend and is “astonished” Qualcomm does not want to sit down until Tuesday. He reiterated that $82 per share is his “best and final” offer, and he provided a 90-page proposed merger agreement.

“We hope that your willingness to meet with us reflects Qualcomm’s genuine intent to reach an agreement with respect to our Feb. 5 proposal,” wrote Tan in a letter to Jacobs.

“After having met with most of your largest shareholders this past week, we have no doubt that this is their strong desire as well.”

Legal battles

Qualcomm’s ongoing legal battles with Apple and global antitrust regulators over patent licensing have weighed down its share price for more than a year as other tech stocks have soared.

In early November, Broadcom, a key Apple supplier, offered $70 per share for Qualcomm, but the board rejected that as too low. Tan then nominated alternative candidates to replace all 11 members of Qualcomm’s board of directors in a hostile takeover bid.

Tan turned up the pressure Monday by boosting his offer to $82 per share — with $60 in cash and $22 in Broadcom stock.

The new price values Qualcomm at $121 billion, making the proposed merger the largest ever in the tech sector. It would create a semiconductor juggernaut that would trail only Intel and Samsung in revenue. It also would have leading market position in nearly all the high-value chips used in smartphones.

In the letter Thursday rejecting the new offer, Qualcomm’s board wanted to know if Tan was willing to pay more.

“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,” wrote Jacobs.

Re of Fairbanks Capital said Qualcomm “made it pretty plain in the letter that if there is not a higher price coming, they are not interested.”

Qualcomm also contends the huge deal would get heavy scrutiny by global regulators, who could block it.

During a long regulatory inquiry, Qualcomm customers, particularly those in China that have already expressed concerns about Broadcom raising prices, could begin designing Qualcomm chips out of their devices.

Royalty payments

In addition, more device makers could join Apple and another company — believed to be Huawei — that have stopped paying patent royalties to Qualcomm.

Device makers could be emboldened to cease royalty payments given Tan’s recent comments to Bloomberg that referred to Qualcomm as a patent troll and asserted its patent licensing business model is not sustainable.

“The differences in our business models expose the company to significant customer and licensee risk between signing and closing an agreement,” wrote Jacobs. “It is indisputable that there are significant regulatory hurdles in your proposed transaction. It is also indisputable that if Qualcomm entered into a merger agreement and, after an extended regulatory review period, the transaction didn’t close, Qualcomm would be enormously and irreparably damaged.”

Tan has proposed a “ticking fee” that would pay Qualcomm 6 percent annual interest on the $60 cash portion of the deal should it take more than a year to close.

He also served up an $8 billion breakup fee should regulators block the deal.

Daniel Ives, head of technology research at GBH Insights, estimated that the breakup fee would be $10 billion. If the two sides begin talking, they could pave the way for a deal, he said.

“Even though Broadcom says ($82 per share) is the best and final offer, we think there is wiggle room there,” Ives said.

“That was the whole goal, to get them to the table. The next step now for Broadcom is to put more pressure on the board and management team, along with potential activist shareholders, to consider a revised bid of more cash, less stock and a lower breakup fee.”

Qualcomm rejected Broadcom’s $82 per share offer after the markets closed Thursday.