Broadcom makes $130 billion acquisition deal for Qualcomm

Broadcom Limited announced its intention to purchase Qualcomm for $130 billion, including debt. Broadcom, a semiconductor maker whose chips help power Apple’s iPhones, offered $70 a share in cash and stock for Qualcomm, the world’s largest maker of mobile phone chips and Broadcom’s rival. Purchasing Qualcomm would make Broadcom the world’s third largest chipmaker, behind Intel Corp. and Samsung Electronics Co. Broadcom would also become a major provider of essential components to build the more than a billion smartphones sold annually. If the deal is completed, it would be the largest deal in the history of the technology industry.

According to Bloomberg, “The combination of the two companies could generate strong synergies and create a dominant wireless business and overall powerful global semiconductor leader,” said Mike Walkley, an analyst at Canaccord Genuity Group Inc.

However, Qualcomm is preparing to fight the bid. It argues that Broadcom has undervalued the company, and argues that the proposal is a push to purchase the firm cheaply. It wants to recommend that shareholders reject Broadcom’s bid.

Hock Tan, CEO of Broadcom, appeared with President Donald Trump last week to announce his plans to move the company’s legal headquarters from Singapore to the United States. Trump praised the decision as an endorsement of his business-focused tax plan, calling Broadcom “one of the really, great, great companies,” according to The New York Times.

However, with Broadcom’s recent bid for Qualcomm, the real reason for Tan’s announcement seems apparent. The deal will most likely receive regulatory approval with Broadcom now being based in the United States, and the company having Trump’s support.

It is not as easy as it appears, though. Technology companies are under increased scrutiny as of late, being the focus of sexual harassment scandals and recent hearings by the Senate Intelligence Committee for their influence in the 2016 presidential election, among other unsavory topics. Trump has not expressed much support for foreign acquisitions either, which is what Broadcom is trying to achieve with this deal. Additionally, if Broadcom’s deal was to be approved, it could open the path for other companies to try similar tactics in getting U.S. regulatory approval.

Nevertheless, analysts and investors have suggested that a merger between the two companies could still be “blocked on antitrust grounds or because Broadcom could still be considered a foreign company buying sensitive technology,” according to The New York Times.

Tan and Broadcom have denied any relation between the Trump announcement and the Qualcomm bid, claiming that the timing was a mere coincidence. Broadcom stated publicly that its plan to move its legal headquarters to the United States was a result of Republican efforts to overhaul the tax code, particularly the slashing of the corporate tax rate.

In an interview, Tan said, “We think very long term. What we perceive is that the business environment has steadily improved. As we want to grow our business in the long term, that makes it easier to choose to redomicile in the U.S. to sustain our growth trends.”

Tan has long advocated for consolidation within the semiconductor business. Over the years, his strategy has involved purchasing established chip franchises with good profit margins, and selling off the parts that are not profitable. Growth by acquisition has become the norm in the chip making industry. The industry has largely matured, change has stagnated and companies have instead focused on price competition, which results in selling products at lower prices and overall lower profit margins. Tan’s method has been to grow Broadcom by purchasing profitable, well-known companies and attempting to run said companies more efficiently, while also focusing on developing products that customers like Apple and Samsung want to buy.

However, this focus on consolidation has led to fears from regulators and analysts that the chip industry could become an oligopoly. For example, Broadcom has another bid, worth $5.5 billion, for Brocade Communications Systems, currently awaiting national security approval.  Qualcomm itself is trying to acquire NXP Semiconductors for $38.5 billion. Antitrust approval may become a major factor in the bid’s survival. According to The New York Times, in January, the Federal Trade Commission brought charges against Qualcomm, accusing the chipmaker of “abusing its monopoly in certain chips to charge unreasonable rates to partners” including Apple. Whether Republican antitrust enforcers, assigned by Trump, will be more lenient is yet to be seen.

Qualcomm has stated that its board was weighing Broadcom’s offer. Tan said that he would prefer a consensual deal, but went on to say that he would take whatever steps he felt were necessary to ensure his deal’s success.