Chip Pileup

Broadcom Tests the Limits of Semiconductor M&A

Both companies have already been aggressive buyers, and the integration work involved in this $130 billion proposal would be daunting.
Photographer: Brent Lewin/Bloomberg
BROADCOM LTD
-4.28
At Closing, January 22rd
262.11 USD
QUALCOMM INC
+0.63
At Closing, January 22rd
68.67 USD

How many megasized semiconductor deals are too many?

That's the question Broadcom Ltd. shareholders should be asking themselves as the chipmaker launches a $130 billion-plus takeover bid for Qualcomm Inc. The target company has said it will assess the deal, but it's reportedly gearing up to reject Broadcom's $70-a-share cash and stock bid on the grounds that it's opportunistic and poses regulatory risks. These are valid objections, but we've got another one: integration risk.

Buy Low

Broadcom's $70-a-share offer would have represented a much lower premium to Qualcomm shares this time last year. Qualcomm's stock has been pressured by its legal fight with Apple.

Source: Bloomberg

This would hardly be the first megadeal that either has attempted. Broadcom is the product of a $37 billion merger between Avago Technologies Ltd. and Broadcom Corp. in 2016. Broadcom is also trying to buy Brocade Communications Systems Inc. for $5.9 billion, only about a year after the target company agreed to buy Ruckus Wireless for about $1 billion. Meanwhile, Broadcom says it's also willing to include Qualcomm's proposed $40 billion-plus purchase of NXP Semiconductors NV in its offer for Qualcomm, should that deal get completed. Don't forget that NXP itself purchased Freescale Semiconductor Ltd. for $17 billion in 2015.

Not Enough

NXP is trading above Qualcomm's $110-a-share offer, resulting in a negative spread, amid bets that pushback from investors including Elliott Management will force a higher bid.

Source: Bloomberg

Is your head spinning yet? And those are just the big deals these companies have announced over the past four years. All in, semiconductor makers have drawn in the neighborhood of $400 billion in takeover offers since the start of 2011. Broadcom -- and its Avago predecessor -- have been among the most active buyers.

There's a saying among analysts about Broadcom CEO Hock Tan and his dealmaking prowess -- "In Tan, we trust." That's nice and all, but even the best operators face a formidable challenge in integrating a pileup of six massive deals.

A big motivator for all this dealmaking is the increasing importance of scale as semiconductor makers grapple with rising costs for ever-more-complex designs and a shrinking customer base. Buying both Qualcomm and NXP would make Broadcom the third-largest chipmaker in the world and give it a significant share of the market for smart-phone components.

But there's a limit to the benefits of sheer size, as we've seen in Qualcomm's nasty legal brawl with Apple Inc. Qualcomm's dominance of the market for smartphone technologies and the high royalties it charges customers whether or not they use its products is at the heart of that fight. Apple, one of the largest customers of Qualcomm's modem chips, is even contemplating switching to different components for next year's iPhone and iPad models.

The Royal(ty) Treatment

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

A Broadcom-Qualcomm deal smacks of peak M&A among semiconductor makers. And it may only get more expensive and complicated should Qualcomm successfully negotiate a higher price.

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

    To contact the author of this story:
    Brooke Sutherland in New York at bsutherland7@bloomberg.net

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

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