As we enter November, we can look back on this year as one of riveting deals across all sectors. From Verizon’s $4.5 billion acquisition of Yahoo, to recent reports of a Hasbro takeover offer for rival Mattel, we’ve seen the scope of mergers truly expand. But even now, the TMT (Technology, Media, Telecom) sector is unrelenting as the most recent bid sends shockwaves through the financial world: Broadcom’s bid for Qualcomm.
Broadcom’s offer is a $70 a share bid comprising of $60 in cash and $10 per share in Broadcom stock. This values Qualcomm at nearly $130 billion including net debt, making it potentially one of the largest technology acquisitions recorded if executed. Hock Tan, Broadcom CEO and brains behind its success, states that the premium in cash coupled with potential of the new company makes the deal a no brainer for shareholders. But, the deal isn’t as dichotomized as we’ve been lead to believe. With the board meeting this weekend to formalize a response, reports state that Qualcomm is slated to reject the offer. The main reason? Undervaluation.
Qualcomm has a historically strong presence in the cellphone chip industry and a strong repertoire of intellectual property. This makes them a key player in the world of mobile broadband as their technologies are found in nearly every chip provided by every network service. But a recent slew of legal battles against industry giant Apple have dropped share price, leaving them severely vulnerable to this move from Broadcom. Steven Mollenkopf echoed this sentiment, stating that the $70 a share bid undervalued the company and didn’t account for regulatory risks.
Looking at the aforementioned facts, we can understand the reserved sentiment from Qualcomm. Qualcomm is on the edge of the broadband and mobile data industry, with the firm having a dominant IP portfolio in 3G, 4G LTE, and upcoming 5G technology. Conversely, Broadcom has been lacking R&D in these areas, leaving little for it to gain from the oncoming new wave of technology. Furthermore, there is disharmony between the firms’ ideologies. Hock Tan has been known to adopt a hyper cost-effective outlook on acquisitions, often placing emphasis on short term profits and selling off divisions that aren’t profitable. While these attributes are synonymous with great CEOs, they don’t necessarily extend to great companies.
Qualcomm culture is atypical to typical Wall Street culture in that it emphasizes long term innovation over short-term profits. 4G LTE, 5G, image processing systems, improved ARM SoC (System on Chip) – these are all technologies that Qualcomm has been investing in for years. By focusing on the technology of tomorrow, Qualcomm has not only managed to root itself as a key market influencer, but has also taken current broadband technology years beyond what would have been possible if it had maintained a short-term focus.
If the acquisition goes through, we can be certain Hock Tan will place an emphasis on maximizing shareholder profit and cutting away ‘underperforming’ divisions. While this may ensure short term profitability, such an approach inhibits the forward-looking nature that Qualcomm has thrived on. Limited focus on developing new technology will cripple Qualcomm’s success and the impact it has on developing next generation technology.
Thus, we can see the cracks in the rationale behind this merger. The most obvious is the financials, where it’s evident that Broadcom is taking advantage of a Qualcomm weakened by lawsuits. But beyond that, this merger stands to detrimentally affect the growth of wireless technologies and innovation in the mobile ecosystem. By placing Qualcomm in the hands of a CEO who’s first steps will be to ‘minimize costs’, shareholders may gain in short term profits, but we all stand to lose out in the long run.