San Diego-based Qualcomm on Monday rejected rival Broadcom's unsolicited $103 billion bid as too low, setting the stage for a hostile proxy fight for control of the company.
"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.
Qualcomm also said that the bid "comes with significant regulatory uncertainty."
Broadcom offered $60 a share in cash and $10 in stock for Qualcomm – a 28 percent premium over the company's share price before news of the bid leaked on Nov. 3 — making it the largest tech deal ever. When including Qualcomm's debt, the deal is valued at $130 billion, or double the value of Dell's then record-setting $65 billion purchase of EMC in 2015.
Broadcom responded Monday with a news release reasserting its commitment to the acquisition.
"We continue to believe our proposal represents the most attractive, value-enhancing alternative available to Qualcomm stockholders and we are encouraged by their reaction," Broadcom CEO Hock Tan said in a statement. "Many have expressed to us their desire that Qualcomm meet with us to discuss our proposal. It remains our strong preference to engage cooperatively with Qualcomm's Board of Directors and management team."
If a deal is completed, the combined companies would have annual sales of $51 billion – trailing only Intel and Samsung in the semiconductor industry. Any deal will face tough regulatory scrutiny, particularly in Europe and China.
"We fully expected (Qualcomm's board) to reject Broadcom," said Mike Walkley, an analyst with Canaccord Genuity. "Broadcom's bid of $70 per share, and Qualcomm's rejection of it, shows both companies' confidence that the Apple licensing dispute can get resolved."
Broadcom's bid has been seen by analysts as an offensive move that takes advantage of Qualcomm's lagging stock price, which was down 18 percent over the trailing 12 months before Broadcom's takeover offer.
Qualcomm's shares have been weighed down by its nasty legal battle with Apple over patent royalties, fines from antitrust regulators and slow progress on its planned $38 billion acquisition of NXP Semiconductors. Up to now, Qualcomm has preached patience.
"No company is better positioned in mobile, IoT, automotive, edge computing and networking within the semiconductor industry," said Qualcomm CEO Steve Mollenkopf, in a statement. "We are confident in our ability to create significant additional value for our stockholders as we continue our growth in these attractive segments and lead the transition to 5G."
Meanwhile, Broadcom's shares have surged nearly 50 percent in the past 12 months as it completed the Broadcom/Avago Technologies acquisition, paid down debt and increased revenue and profitability.
The current Broadcom was created last year when Tan's Avago Technologies Ltd. bought the Irvine-based chipmaker for $37 billion and adopted the Broadcom name for the combined company. The cash-and-stock deal amounted to a 21 percent premium over the Irvine firm's market value in the week before the deal was announced, according to data provided by Dealogic.
Tan brought up combining the two companies with Qualcomm in August 2016, when Qualcomm's shares traded at significantly higher prices.
Broadcom will likely raise its bid, and try to force a hostile takeover by nominating members to Qualcomm's board of directors to help push the deal through, Walkley said. Canaccord, which rates Qualcomm's stock as a buy, believes Qualcomm shareholders are looking for a bid over $80 per share. The value assumes Qualcomm can settle its royalty dispute with Apple and receive at least $5 per iPhone, or half the value of the royalty before the dispute.
Qualcomm's board members are up for re-election annually and Broadcom has until Dec. 8 to submit a slate of alternative candidates.
"I do strongly believe that Qualcomm wants to remain independent, but that might be out of its control now," Walkley said. "I think we're in the early stages of a longer-term battle."
Coming in at 28 percent premium, Broadcom's initial offer is already one of the more generous bids among the world's top tech dealmakers. Of the top 10 technology deals, either pending or completed, Microsoft's $28 billion takeover of LinkedIn was completed at the highest markup, amounting to a 45 percent bump over LinkedIn's market value in the week before the deal was announced, according to Dealogic.
Monday, Qualcomm's stock closed at $66.49, up 2.97 percent. Shares in Broadcom closed at $265.01, up 0.02 percent.
8:39 a.m.: This article was updated with additional details.
4:20 p.m.: This article was updated with additional details.