The Strategist

Broadcom prepares the largest deal in the hi-tech history

11/07/2017 - 14:05

Producer of wireless chips Broadcom offered to buy out its competitor Qualcomm for $ 130 billion. The price is calculated from the cost of Qualcomm shares on November 2 (when news about the possible transaction appeared) with a mark-up of about 28%. It is proposed to provide part of the deal with Broadcom shares.

Broadcom, the world's fourth largest electronic chip maker based in the US and Singapore, is ready to buy Qualcomm shares at $ 70 per share, which means a 28 percent premium to last Thursday's closing price. The proposal provides for the payment of $ 60 in cash and another $ 10 securities of Broadcom for each Qualcomm share.

Broadcom reported that it is ready to pay about $ 103 billion for Qualcomm. However, taking into account debt of the potentially acquired company, the value of the deal is increased to $ 130 billion. Broadcom is also going to acquire Dutch chip maker NXP, which Qualcomm has not formally swallowed yet. In this case, the debt load will reach $ 90 billion. Broadcom intends to apply for investment financing to investment banks and funds.

If the two companies unite, they will supply chips for the entire spectrum of electronic devices - from home appliances to data centers. The microelectronics industry, where Intel and Samsung Electronics are the largest players, is now under pressure due to declining sales in a number of market segments, in particular in the personal computer segment.

Qualcomm intends to investigate the proposal and is likely to reject it on the grounds that, given the risks offered by Broadcom, the price is too low given the fall in stocks in recent months, writes The Wall Street Journal. But if Qualcomm accepts the offer and the deal is approved, it will be the largest in the history of technology companies, notes Reuters.

Broadcom Ltd. is considered one of the largest manufacturers of chips for communication devices. The company, currently one of the ten world leaders in semiconductor sales, was created as a result of the merger of Broadcom Corp. and Avago Technologies.

First of all, Qualcomm is known as a manufacturer of microchips for modems, including mobile devices. Because of the conflict with its largest buyer - Apple - Qualcomm shares have now fallen by about 25%, to the lowest level in recent years, which weakened the company's position.

In the fourth quarter of fiscal year 2017, which ended on September 24, 2017, Qualcomm's revenue was $ 5.91 billion, down 4.5% year-on-year, but above the $ 5.8 billion average forecast from analysts surveyed by Thomson Reuters I/B/E/S.

Net profit in the IV fiscal quarter decreased by 89% year on year and amounted to $ 168 million compared to $ 1.6 billion a year earlier. The operating profit of Qualcomm decreased during the reporting period by 82% year-on-year to $ 300 million compared to $ 1.8 billion a year earlier.

Moreover, the adjusted profit of the company was at the level of 92 cents per share, which surpassed analysts' forecasts of 81 cents per share.

The drop in profits of the American chip maker is attributed to the payment of a fine of 23.4 billion Taiwan dollars ($ 773 million) at the request of the Taiwan Fair Trade Commission. According to the regulator, within seven years, Qualcomm has used illegal practices, expressed in granting rights to the underlying patents in the field of cellular technology basing on unequal and unreasonable terms.

The patent licensing unit recorded a 36% decrease in revenues to $ 1.2 billion. This business largely depends on Apple's royalties, but the iPhone and iPad maker has recently refused these payments, explaining its decision by Qualcomm’s illegal licensing policy.

Termination of cooperation with Apple could deprive Qualcomm of about $ 1.8 billion in revenue per year, say analysts at Raymond James & Associates. According to experts, if Qualcomm's contract is terminated, 7.5% of revenue will not be credited. In 2016, the company's turnover was measured at $ 23.55 billion, so the estimated chipmaker losses could reach $ 1.77 billion.

According to Macquarie Capital research firm, last year Qualcomm supplied Apple with modems for mobile devices for $ 3.2 billion, or about 20% of the company's total microchip sales.


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