Broadcom Wants Qualcomm, But Would Takeover Strangle Innovation?
For well over a decade, Qualcomm has been the research and development engine driving advances in cellular wireless. By making big bets on technologies years ahead of time, it created inventions that now enable streaming video, street-by-street directions, photo sharing, longer battery life and a host of other features found on nearly every smartphone on the planet.
If Broadcom succeeds with its bold $103 billion takeover bid to acquire Qualcomm, would it continue the practice of pursuing long-term research on the next big innovation that pushes the mobile technologies forward?
An increasing number of analysts don't think so. It is not the way Broadcom Chief Executive Hock Tan has run his companies over the years.
"He optimizes everything around efficiencies," said Jim McGregor, principal analyst with Tirias Research. "He is an investor. The philosophy he is taking is: We don't invest in research and development. We buy it."
Broadcom's effort to acquire Qualcomm -- which could be headed for a hostile proxy fight for control of Qualcomm's board of directors -- would attempt to meld it to very different business models and cultures around innovation, say analysts.
"You have the risk takers, and then you have the ones that let the market play out and then go in," added McGregor. "It's a more conservative approach. I'm not saying it's bad. It just doesn't help with innovation. It doesn't drive the market."
Making that marriage work without destroying what makes Qualcomm valuable could be difficult. It would be like attempting to build a clock with two completely different sets of parts -- one geared toward turning the hands clockwise and the other designed to spin the hands in the opposite direction, said Olivier Blanchard, senior analyst at Futurum, a technology strategy and research firm.
"Qualcomm invests in stuff that doesn't have to be profitable for a while," he said. "They're not going quarter by quarter. They have a bigger strategy.
"Whereas Broadcom is super good at cutting costs and being a financially driven company," he continued. "That is great for investors quarter to quarter but doesn't necessarily have the focus to want to build things for the long term."
While the companies may not be a perfect cultural or business model match, they certainly make a compelling pair financially.
After cost cutting and assuming completion of Qualcomm's $38 billion pending acquisition of Dutch chip maker NXP Semiconductors, the combined companies would create a juggernaut with $51 billion in revenue and a $22 billion annual operating profit -- trailing only Intel and Samsung in the semiconductor industry.
The conglomerate would own a leading market position in nearly every high-value chip inside smartphones.
Earlier this month, Broadcom offered $70 a share for Qualcomm in cash and stock, representing a 28 percent premium in its share price the day before rumors of the offer made headlines.
Qualcomm's shares were trading at low levels because of its fierce legal battle with Apple and global antitrust regulators over patent fees. Qualcomm executives have preached patience -- noting that it has favorably resolved patent licensing battles with Nokia and others before.
With its stock price down 18 percent over the past year, patience from hedge funds, mutual funds and other institutional investors that make up 78 percent of Qualcomm's investor base may be wearing thin.
Broadcom's takeover offer is far from a done deal, however. There's considerable risk that global regulators would block the sale. Qualcomm rejected Broadcom's offer Monday as dramatically undervaluing the company.
But Broadcom's bid is serious. It could pursue a proxy battle to win board seats to push the deal through. It also could to boost the offer price into the high $70s to low $80s per share range, said RBC Capital Markets analyst Amit Daryanani in a research note.
Such a move would force Qualcomm's shareholders to decide "can Qualcomm's management, which has overseen severe underperformance and been unable to resolve key disputes, turn the ship; or should shareholders put faith in Hock Tan and take the exit?" wrote Daryanani. "We think status quo isn't a feasible option anymore, especially if Broadcom were to raise the offer" heading into a proxy battle.
Tan has been very successful at growing his core company, Avago Technologies, through a series of acquisitions. His largest to date was Irvine-based Broadcom, which Avago bought for $37 billion in 2016 and took the Broadcom name.
The company is strong in Wi-Fi/Bluetooth, broadband infrastructure and data center networking chips. Tan has been a master at absorbing the companies he acquires -- delivering strong financial performance. Broadcom's share price has surged nearly 61 percent over the past 12 months.
In an interview with the U-T, Tan contends Broadcom is a technology company that invests in research and development. He views the firm as a portfolio of market leading product lines, which he calls sustainable franchises.
"We identify the strong businesses in the companies we acquire, and in the case of Qualcomm, undoubtedly it's their roots," said Tan. "Their roots trace back to cellular wireless. That is what attracts and excites me about the company. It is the leader -- engineering, technology and market leader -- in cellular wireless. We see that as a very sustainable franchise."
When Avago bought Broadcom, it began to sell off product lines that it didn't see as sustainable franchises. They included its Internet of Things business and wireless infrastructure backhaul division, among others.
"Let's say Broadcom acquired Qualcomm tomorrow -- putting aside regulatory hurdles and all that," said Blanchard of Futurum. "I think Broadcom would have a tendency to get rid of all the business units and projects that aren't going to be very quickly profitable."
Qualcomm, on the other hand, invests in technologies that are years from producing a return on investment. It has been working on 5G, which aims to deliver fiber-optic like speeds to mobile devices, for a decade, even though 5G technology isn't expected to start generating a return on investment until 2019.
"While start-ups are good innovators, you still need companies that have the staying power, the investment capabilities and everything else to build a market, build an ecosystem," said McGregor of Tirias Research. "That is why you need companies that are risk takers and have that investment capability like a Google, an Intel, a Qualcomm, etc."
This strategy, however, can create tension between the company and shareholders -- particularly when operating expenses rise and the stock price lags peers.
In an interview last week, retired Qualcomm co-founder Irwin Jacobs, said the balancing act of making long-term investments while keeping shareholders happy is not easy.
"Perhaps what's a little bit different than when I was running Qualcomm is there is a lot more institutional ownership," said Jacobs, 84, who is no longer actively involved with the company. "Sometimes the institutions might not look at things quite the same way as you do on different business issues."
While Broadcom has amassed an impressive technology portfolio, its lack of cellular chips is a big hole in its product line-up, said Geoff Blaber of industry research firm CCS Insight.
"It is clear Broadcom needs Qualcomm far more than Qualcomm would benefit from the tie-up," said Blaber. "This underlines the strength of Qualcomm's position. The gap in Broadcom's portfolio will become a mounting problem" as more far-flung gadgets are equipped with high-speed cellular connectivity and computing power.
For its part, Qualcomm sees future growth potential with the upcoming roll out of ultra-fast 5G networks -- where it is believed to have a technology lead -- and the expansion of cellular technologies into cars, health care devices, the Internet of Things gadgets and other industries.
The company has been expanding smartphone products to include radio frequency chips used near antennas. Moreover, the acquisition of NXP, which makes automotive and security chips, would help ease Qualcomm's reliance on the slowing smartphone market.
During its 2017 fiscal year ending in September, the company took in $3 billion of its $22.3 billion in revenue from non-smartphone customers. That is a 25 percent increase from the prior year.
In addition, its chip making division -- which pulls in most of its revenue -- has boosted profit margins for six straight quarters. Its patent licensing business, which accounts for most of its profits, struggled as Apple and another large smartphone maker stopped paying royalties for using Qualcomm's patented cellular technologies.
"It's not like Qualcomm is bad at making money," said Blanchard of Futurum. "They understood how to monetize 3G. They understood how to build and monetize 4G. Now they are doing it with 5G and already working on technology beyond that. They are a long bet company."
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Image credit: Product shot by Qualcomm.
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Posted: 2017-11-27 @ 7:08pm PT
I think Qualcomm is much better off without Broadcom. Qualcomm is our future, while Broadcom is much more short sighted, only interested in short term gains. Qualcomm is the type of company that makes US great, while Broadcom is just someone with deep pocket buying out all the competitors. Hope the Qualcomm board sees this.