Qualcomm’s rejection sets stage for Broadcom’s proxy battle

Qualcomm rejected Broadcom’s US$105 billion acquisition offer, kicking off what would be the largest technology takeover battle in history.

The San Diego-based company recommended shareholders spurn the deal, saying it’s an opportunistic move by Broadcom to buy the wireless-chip maker on the cheap. Qualcomm also said the transaction may face regulatory scrutiny that would cast doubt on its completion.

The rebuff ratchets up pressure on Broadcom to sweeten its offer, or embark on a proxy battle, which carries its own risk of rejection by shareholders. For now, Broadcom said it remains ” fully committed” to going ahead with the purchase.

“It is the Board’s unanimous belief that Broadcom’s proposal significantly undervalues Qualcomm relative to the company’s leadership position in mobile technology and our future growth prospects,” said Paul Jacobs, executive chairman and chairman of the board of Qualcomm, in a statement.

Broadcom chief executive Hock Tan on Nov. 6 offered US$70 a share in cash and stock for Qualcomm, seeking to build a powerhouse that leads the market for wireless chips in devices like Apple Inc. iPhones. Even before Qualcomm’s response, Tan and his advisers were preparing to wage a proxy battle in which they appeal directly to Qualcomm investors.

Qualcomm rose three per cent to close at US$66.49 in New York Monday. Since the offer from Broadcom, it has traded below the bid price on skepticism that a transaction can be completed. Broadcom shares were little changed Monday.

Tan said he’s pleased with the reaction he’s already received from Qualcomm shareholders and customers regarding his proposal and would prefer to keep the negotiations friendly.

“We have received positive feedback from key customers about this combination,” he said in a statement following Qualcomm’s rejection. “We continue to believe our proposal represents the most attractive, value-enhancing alternative available to Qualcomm stockholders and we are encouraged by their reaction. “

Buying Qualcomm would reshape the chipmaking industry, transforming Broadcom into the third-largest semiconductor maker, behind Intel Corp. and Samsung Electronics. The combined business would instantly become the default provider of a set of components needed to build each of the more than a billion smartphones sold every year. The deal would dwarf Dell’s US$67-billion acquisition of EMC in 2015 — then the biggest in the technology industry.

“Qualcomm shareholders are likely to hold out for more, but we believe something in the US$80ish range is likely enough to bring most of them around,” Stacy Rasgon, an analyst at Sanford C. Bernstein, wrote in a note published over the weekend. Broadcom is unlikely to walk away given that there is significant headroom to find a deal acceptable to Qualcomm shareholders, he added.

Tan, who has built Broadcom through a series of transactions that have helped reshape the US$300 billion semiconductor industry, has previously been able to pull off deals with friendly approaches. Acquiring Qualcomm is further complicated by his target’s own push to close a more than US$40-billion purchase of NXP Semiconductors. That purchase is being held up by regulatory approval. Tan said his offer for Qualcomm stands with or without Qualcomm’s acquisition of NXP.

For now, Qualcomm’s board is sticking with its management team, led by CEO Steve Mollenkopf.

“After a comprehensive review, conducted in consultation with our financial and legal advisers, the board has concluded that Broadcom’s proposal dramatically undervalues Qualcomm and comes with significant regulatory uncertainty,” said Tom Horton, the company’s presiding director, in the statement.