Deals

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.

Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.

Well, that didn't take long.

Broadcom Ltd. is exploring a $100 billion-plus takeover of chipmaker Qualcomm Inc., Bloomberg News reported on Friday. This is the same Broadcom that yesterday announced its decision to move its legal headquarters to the U.S. in an Oval Office presentation that carried the usual bravado of President Donald Trump's administration. We wondered then if this sudden bout of American patriotism was really about smoothing the path to approval for Broadcom's $5.9 billion takeover of Brocade Communications Systems Inc. and future deals it might contemplate as one of the semiconductor industry's most active acquirers.

With Broadcom CEO Hock Tan's hand barely out of President Trump's grip, it's now clear M&A was certainly on his mind. Merging with Qualcomm won't be an easy feat, but it's certainly easier if Broadcom is also a U.S. company. There's no way regulators would have allowed such a beacon of American semiconductor prowess to pass into the hands of a Singapore-based company that gets half its sales from China.

Big -- and Busy -- Spender
Avago, now known as Broadcom after its 2016 takeover of the company, is one of the more active acquirers in the semiconductor industry
Source: Bloomberg

As far as targets go, Qualcomm is a bit of a surprising one. Until shares jumped Friday after the Bloomberg News story, about $16 billion of Qualcomm's market value had been wiped out since the beginning of the year as it contends with a bitter legal fight with Apple Inc. and scrutiny from government agencies around the world. The decline makes Qualcomm look like a nice bargain for Broadcom. It's reportedly offering $70 a share in a mix of stock and cash, or about $103 billion not including debt. That represents a 22 percent premium to Qualcomm's closing price on Thursday, but it's basically equal to what the company commanded in the market last December.

On the other hand, Apple's lawsuit and the numerous antitrust investigations also threaten the fundamental underpinning of Qualcomm's business. Qualcomm makes the majority of its operating profit from the fees it charges for proprietary technology, and companies pay this Qualcomm tax whether or not they use the chipmaker's products.

Nice, If It Lasts
Qualcomm makes the majority of its pretax earnings from royalties it collects on the company's proprietary technology. Annual pretax earnings by segment:
Source: Qualcomm

Apple has attacked this aspect of Qualcomm's business. It's also now reportedly contemplating designs for next year's iPhone and iPad models that don't use the chipmaker's components. And if Apple's legal fight is successful, Qualcomm could be significantly less valuable in the future. That's the risk Broadcom would be taking.

Ready to Pounce
Broadcom's outperformance this year arms the company with a stronger currency to pursue a major acquisition. Qualcomm, meanwhile, has gotten cheaper.
Source: Bloomberg

Qualcomm is also still trying to complete its $40 billion-plus takeover of NXP Semiconductors NV. It's not clear if Broadcom would want to see that merger get done before it bids on Qualcomm or if it is proposing an alternative to that deal.  NXP investors, including Elliott Management Corp., have criticized the deal as undervaluing the target company. As of Oct. 19, just 3.6 percent of NXP holders had tendered their shares.

Wait for It
NXP shares were trading above Qualcomm's $110 -a-share offer, resulting in a negative spread. This indicates traders were betting on a higher price.
Source: Bloomberg

Elliott reportedly wanted NXP to renegotiate with Qualcomm, remain a stand-alone company or find another buyer -- basically any option except the current deal. Now it might get its wish. For what it's worth, NXP dropped more than 5 percent on this news.

Broadcom isn't even a U.S. citizen yet but it's already mastered the American art of supersizing things. 

--With graphics assistance from Gadfly's Gillian Tan

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net
Shira Ovide in New York at sovide@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net