The Strategist

The largest hi-tech deal in the world is still in doubt

02/05/2018 - 13:45

There is a storm in the sector of chip production now, and the stakes rose to one and a half hundred billion dollars. The merger of Broadcom and Qualcomm will create an absolute leader in the chip market.

Maurizio Pesce
Maurizio Pesce
Broadcom Ltd, which wants to absorb or merge with Qualcomm Inc., made a new proposal and it is difficult to resist. The US chip maker has raised the offer to almost 145 billion dollars. Thanks to the huge money, the Americans hope to convince the rival shareholders from Singapore to approve the deal on March 6. The new Broadcom offer is significantly more profitable for Qualcomm. Suffice it to say that initially the Americans offered $ 70 ($ 60 in money and 10 shares) for the Singapore company's share, but now the price has risen to $ 80-82.

The final figures will be approved at a meeting of the American company’s management with advisors, which will take place on the coming Sunday. In addition, the penalty for the termination of the contract in the event of a deviation by its regulators will be much higher than usual. Its size is 3-4% of the amount of the transaction itself. Manufacturers of chips from San Diego offer such tempting conditions not only to persuade Singaporean competitors, but also to get regulatory approval.

Broadcom's attempt to absorb Qualcomm is considered a vivid example of a very sharp struggle in the history of mergers and acquisitions. This will be the largest transaction in the world of high technology. If Broadcom achieves its goal, the result will be one of the main leaders in the chip market, a producer of smartphones chips, chips for the next generation of electric vehicles and son on. Now Qualcomm is the largest manufacturer of SoC for smartphones and tablets, and Broadcom leads the niche of Wi-Fi modems.

After the merger, the new giant will be second only to Intel and Samsung. Its market value will come close to $ 200 billion. The chips of the new company can be found in storage systems, in equipment for cable and wireless networks, in mobile equipment. The new company will become a powerful supplier of chips and will be able to dictate prices.

Despite the number of zeros, most observers believe that the proposal will not impress Qualcomm’s management and shareholders. Broadcom understands this and very much rely on the strong pressure from investors. The price per share around $ 80 is likely to impress them.

People close to Broadcom's 65-year-old director Hock Tan emphasize that he wants the deal to be a friendly merger rather than a hostile takeover, and therefore is ready to withdraw the demand to replace the board of directors of the Singaporean company with his people. Qualcomm’s managers, however, repeatedly pointed to the low price of shares of the American firm. The Americans argue that all problems will eventually be resolved and the price will rise.

Qualcomm has recently conducted legal battles with Apple on a number of issues, including royalties from the sale of chips. In addition, the company needs cash to close the acquisition of its $ 39 billion rival, NXP Semiconductors. The European Commission approved the deal in January. Now the company is awaiting approval of China. Although the management of Qualcomm has repeatedly stated that the merger with Broadcom will meet the almost insurmountable objections of regulators, now Singapore expect to get permission for it in February. However, that does not mean that the deal will happen immediately.

Qualcomm claims that the company's share price will rise after resolving these issues, as well as launching the 5G, which will connect a variety of gadgets. "Therefore, we rejected Broadcom's attempt to acquire us at an extremely low price, taking into account the very unstable and possibly zero probability of approval of the transaction by regulators," the January letter of the board of directors of the Singapore company said. The bidding is still going on.