It is no surprise that Broadcom’s huge $130bn bid for fellow semiconductor company Qualcomm is featuring in several financial news publications. The bid valued Qualcomm at a huge $70 per share, and the new company would be the 3rd largest semiconductor firm in the world.
As the potential largest acquisition of all time in the technology space, why are Broadcom so keen to acquire Qualcomm?
According to Fortune, in 2016, Qualcomm’s sales revenue amounted to $22bn in comparison to Broadcom’s $18bn. Broadcom was positioned as the fifth largest semiconductor company globally, whereas Qualcomm was ranked within the top 3 for the same year. When Broadcom moved into the top 10 in 2010, Qualcomm was ranked 9th.
It is clear that the two firms are current rivals, and that a deal between the two would create a huge company with a large market share. The transaction, if completed, would mean that the new company would control around 55% of the market for Wi-Fi chips and 27% of the market for radio-frequency chips for mobile devices. This would provide more price-setting power and would allow Broadcom to raise prices further, a strategy they have employed in some markets already.
The market power motive is, therefore, a major reason for the deal. Not only would this help in following their existing pricing strategy, but Broadcom would completely eliminate Qualcomm as competition and have more power to compete with other semiconductor firms.
Qualcomm’s stocks have been underperforming drastically since the beginning of the year. In 2014, Qualcomm’s stocks were valued at over $80 per share; before news of the deal broke out, the share price was 40% lower than this figure.
Apple is suing Qualcomm in numerous countries amidst reports that the company had been augmenting the value of its royalty payments, and that it had been requiring Apple to pay a proportion of iPhone revenue in return for Qualcomm patents. In the US alone, Apple is litigating the semiconductor and telecommunications equipment company for over $1bn. The process is expected to be a lengthy affair, and it is no surprise that Qualcomm’s stock price has suffered as a result. In addition, regulators in South Korea, Taiwan and China have imposed substantial fines on Qualcomm for supposed anticompetitive behaviour. This has had a similar effect on the firm’s share price.
Therefore, despite paying a 28% premium on the stock price before reports of the deal emerged, it seems as though this is the perfect time to acquire the company given its recent stock price history.
Research and Development
Wireless carriers in the US are close to releasing 5G technology and Broadcom may feel that this, again, is the perfect time to purchase Qualcomm. Qualcomm has invested heavily in 5G technology, whereas Broadcom does not excel in this area. Thus, Broadcom may want to benefit from this research and development, as it is a lucrative opportunity to invest in 5G at this point in time.
Broadcom’s merger of Brocade and Qualcomm’s acquisition of NXP are two deals that are still yet to completed. If these two deals are finalised alongside the proposed takeover of Qualcomm, there may be large coordination issues to deal with, in terms of integrating the various divisions and subdivisions of each individual company with each other. The initial costs of rationalisation and bureaucracy that come along with the coordination issues are also factors to consider. Therefore, there are some serious negatives for Broadcom to consider.
While the benefits for Broadcom are clear, there are various drawbacks and there is also a high likelihood that the acquisition will not be completed.
Firstly, it is widely expected that Qualcomm’s board is to reject the bid, as the offer is deemed too low. Secondly, any deal would undergo an intense anti-trust investigation, especially in China. There are expanding rivals situated in the country, and US regulators have previously blocked Chinese takeovers of US chipmakers.
However unlikely it is, if the deal does go through and the acquisition is completed, there could be some major benefits to Broadcom; the advantages of the deal far outweigh the drawbacks.