Last week, I wrote about how Qualcomm (QCOM - Free Report) softened its rejection of Broadcom’s (AVGO - Free Report) bid by meeting with its key people: Qualcomm Meets Broadcom After Rejecting Its Revised Offer. But the company reportedly hasn’t said much since then, either to Broadcom representatives or to the public. Its response has instead been to raise the offer for NXP Semiconductor (NXPI - Free Report) from $110 to $127.50 per share in cash.
Raising the price irked Broadcom, which put out a statement saying, “Qualcomm’s board acted against the best interests of its stockholders by unilaterally transferring excessive value to NXP’s activist stockholders." It has also said that it will reduce the cash portion of its own bid for Qualcomm by $3 if it buys NXP at the new price. It’s new offer for the company is $117 billion, reports Reuters.
Qualcomm Needs to Buy NXP
Qualcomm may be able to close the deal at the new price, as it has now got agreements from nine big shareholders, including Eliott Managementand Soroban Capital Partners that had been pushing for a higher price. These investors together control a 28% stake. If 70% of the shares are tendered, Qualcomm can buy out the entire company in a two-step process as agreed with its board.
If NXP shareholders don’t approve the deal, the company will pay $1.3 billion to Qualcomm as cancellation fee and if Qualcomm can’t find the resources or acquire the necessary government approval, it will have to pay NXP $2 billion (China’s MOFCOM is the only regulator left to approve the deal). At any rate, NXP share prices remain close to (slightly below) the revised offer price, so most investors seem happy with it.
The financial considerations aside, NXP solves many problems for the leading mobile chip maker. The company is the leading supplier of automotive chips and has also built capabilities in IoT. Qualcomm on the other hand, leads in mobile chip technology and is attempting to make inroads into Intel’s computing territory. While the mobile phone market is slowing down, automotive and IoT applications, where Intel is building capabilities, represent growth opportunities for the company.
There’s also been some talk about strained ties with its top customer Apple (AAPL - Free Report) , but Qualcomm is taking this one case at a time. In principle, Apple isn’t saying Qualcomm violated the law, but that the law needs to be changed because it unduly favors companies licensing IP on FRAND terms.
The fact that Qualcomm withheld a billion dollars it promised Apple as rebate for using its chips exclusively is a different story. In the meantime, Qualcomm’s receivables are also increasing as Apple continues to use its technology without payment.
While its dispute with Apple escalates, Qualcomm has managed to settle things in Korea with Samsung, the main plaintiff in the Korean FTC case. It’s of course unclear as of now, but Apple could find it more difficult to get the law changed if others across the industry don’t have issue with it. Notably, Qualcomm recently announced 5G partnerships with carriers and handset makers that included most of its current customers but not Apple.
Why Broadcom Wants Qualcomm At All
Broadcom, on the other hand, has a great track record integrating acquisitions (although Qualcomm is by far the largest, so it will be that much harder). Its philosophy is to take out extra costs and increase efficiency of operations. In all probability this is what it wants to do with Qualcomm as well. Qualcomm’s licensing business is naturally high-margin but Broadcom may be able to reduce costs at the chip making division.
The other thing it could do is agree to Apple’s demand that it pay lower royalties and thereby retain a key customer.
The two companies don’t seem to operate at the same level. Broadcom is more about efficient operations (though Qualcomm’s IP won’t hurt of course). Qualcomm on the other hand is more aggressive; it has a good R&D team and wants to keep investing in it. It wants to go after markets that are likely to generate strong growth and it doesn’t mind taking a few risks.
The kind of mindset that has driven Qualcomm’s success and likely will drive it going forward isn’t the same as the one driving Broadcom. But then Hock Tan has been exceptionally successful at integrations, so it could be a good combination, you never know.
Qualcomm shares have a Zacks Rank #4 (Sell). But you can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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