Broadcom raises buyout price for Qualcomm to $121 billion
Chip maker Broadcom boosted its buyout offer for San Diego’s Qualcomm on Monday to $82 per share – ratcheting up the pressure on shareholders to support a hostile takeover bid.
The massive $121 billion merger would be the largest ever in the tech industry, and represents a 50 percent premium over the trading price of Qualcomm’s shares in early November, when Broadcom first made overtures to acquire the company.
Broadcom Chief Executive’s Hock Tan called the increase his “final and best’’ offer for Qualcomm.
In November, Broadcom offered $70 per share to acquire Qualcomm, which the company’s board rejected as too low.
Tan then nominated a slate of alternative candidates to replace all 11 members of Qualcomm’s board of directors in a hostile takeover bid. Qualcomm shareholders will choose either Broadcom’s or Qualcomm’s slate by its March 6 annual meeting.
The new offer would pay Qualcomm shareholders $60 per share in cash and $22 in Broadcom stock. The cash portion of the deal is the same as it was in November. But the new offer increases the value of Broadcom shares from the previous offer of $10 per share.
“Our proposal includes substantially more Broadcom stock, which will allow Qualcomm stockholders a greater opportunity to participate in the upside created by the combined company’s strategic and operational advantages,” said Broadcom Chief Executive Hock Tan in a letter to Qualcomm’s board.
In a statement, Qualcomm said it has received the revised offer and its board will review it.
“We suspect the price is still below what Qualcomm is looking for,” said Bernstein Research Analyst Stacy Rasgon in a report.
The combined company would create a semiconductor giant with more than $50 billion in annual revenue — trailing only Intel and Samsung.
But it also could cause significant upheaval at Qualcomm. Tan is known for operating lean. Broadcom, based in Singapore and San Jose, has roughly 17,000 global employees compared with Qualcomm’s headcount of 33,000.
In its fight against the hostile takeover, Qualcomm has argued that future growth prospects are strong as it pushes into new markets beyond smartphones, including personal computers, computer servers, automotive semiconductors, radio frequency chips and the Internet of Things gadgets.
The roll out of next generation 5G mobile networks beginning in 2019 also is expected to help Qualcomm, which estimates that it has a one to two year lead over competitors in 5G technology.
Qualcomm contends its shares have been temporarily depressed from legal battles with Apple and global antitrust regulators over its business practices surrounding patent licensing.
Once those disputes are resolved, the company believes it can deliver $6.75 to $7.50 per share in earnings in 2019.
But in a presentation to shareholders, Broadcom said Qualcomm has long failed to deliver on its projections, including missing targets for its chip business revenue, cost reductions and operating profit margins.
“Given Qualcomm’s broken promises, should investors believe Qualcomm can accurately project two years forward?” Broadcom said in its pitch to shareholders.
Rasgon called Broadcom’s rebuttal of Qualcomm’s growth prospects “simply brutal.”
“Some elements of particular note include the observation that the 4G cycle did nothing for Qualcomm’s stock in a much better market environment, the fact that Qualcomm’s future growth model is the opposite of their history and that Qualcomm’s stock has traded above $82 for only three days in its entire public company history,” he said.
Broadcom added wrinkles to its new offer. It’s prepared to walk away if Qualcomm pays more than $110 per share price for Dutch automotive chip maker NXP Semiconductors.
“I think the $82 offer is a nice number, but it’s conditioned on Qualcomm not paying more than $110 for NXP, which I feel effectively gives Qualcomm management the ability to beat Broadcom without even talking to them,” said Steven Re, president of Fairbanks Capital Management, a long-time Qualcomm shareholder.
The long-pending, $38 billion deal is awaiting final regulatory clearance from China. Activist NXP shareholders insist the company is now worth $135 per share. They are pressuring Qualcomm to increase its price.
“With the deal contingent upon NXP at $110 or not at all, Qualcomm’s board of directors can hinder the potential takeout by raising the bid for NXP closer to the $135 value that NXP activists have been pushing for,” said Christopher Rolland, an analyst with Susquehanna Financial Group.
With China approval still pending, it’s unclear whether Qualcomm can close the NXP acquisition before before its March 6 annual meeting.
The pressure is on. Broadcom said it will withdraw the $82 per share offer if Qualcomm delays its annual shareholder meeting past March 6.
Perhaps because of the uncertainty surrounding NXP, Qualcomm’s shares fell 6.5 percent on Monday to $61.73 — an unusual drop considering Broadcom’s higher priced offer.
“Going into a shareholder meeting, you have an $82 offer out there, and the stock is at $62,” said Re. “I can’t imagine the institutional shareholder base of Qualcomm is going to like that.”
The new offer would increase the cash amount payable to Qualcomm stockholders if the deal fails to close in one year – as well as pay a significant but undisclosed break-up fee should global regulators block the merger.
Qualcomm believes that product overlap between the two companies would result in at least 18 months of regulatory review, require the sell off of product lines and could be rejected outright by global regulatory bodies.
Broadcom counters that Qualcomm’s portrayal of the regulatory risks is overblown, and Broadcom has fully negotiated financing for the transaction.
If its board candidates are elected by shareholders at Qualcomm’s annual meeting, the Broadcom board “is prepared to invite (current Executive Chairman) Paul Jacobs and one other current Qualcomm director to join the combined company’s board upon completion of the transaction.”
Broadcom’s shares ended trading Monday down 3 percent at $228.10. NXP’s shares dipped 2 percent to $118.19. Both trade on the Nasdaq.
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