Deals

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

Qualcomm Inc. has been through wars. The company's battle-scarred shareholders should at least consider surrender.

Qualcomm on Monday formally rejected Broadcom Ltd.’s audacious unsolicited takeover attempt that is valued at more than $100 billion. Qualcomm’s board said the deal, for $70 a share in cash and stock, substantially undervalues the computer chip pioneer. And Broadcom hasn’t fully addressed how it plans to overcome the many obstacles to its proposal, including the specter of a long and messy regulatory review and what to do about Qualcomm’s own pending mega-acquisition of NXP Semiconductors NV.

Don’t expect Broadcom to take no for an answer. The chipmaker’s next step will most likely be a direct appeal to Qualcomm shareholders. Neither they nor Qualcomm face an easy choice in deciding what to do about Broadcom’s unwanted marriage proposal. Qualcomm on its own has faced so many challenges in recent years, and they may be signs that the company as constituted cannot hold much longer.

Buy Low
Broadcom's $70-a-share takeover offer is nearly equivalent to Qualcomm's share price at this point last year
Source: Bloomberg

Qualcomm has been under siege even before Broadcom arrived on the scene. It was forced by an activist investor a couple of years ago to take a hard look at separating its chip business from its profitable technology-licensing operations. That same licensing operation has been the target of multiple antitrust regulators from China to the U.S. and now has attracted litigation from Apple Inc., one of Qualcomm’s big customers.

It’s hard to think of another company that has faced so many tests of its fundamental business model. Qualcomm and especially the makeup of its board have been improved by these battles. But it would be easy to see why Qualcomm's shareholders may not be willing to keep slogging it out and instead push the company to engage in serious negotiations with Broadcom.

Quaclomm shares have gained $15 billion in market value since the closing share price 10 days ago, before Bloomberg News reported Broadcom's interest in a deal. The stock price, even after a gain on Monday, remains below Broadcom’s offer of $60 a share in cash and $10 a share in stock. The share level shows investor skepticism that the acquisition can pass muster with Qualcomm, its stockholders or regulators. Broadcom shares have retreated after initial gains on news of the approach.

The Royal(ty) Treatment
Qualcomm makes the majority of its pretax earnings from royalties it collects from its technology. Annual pretax earnings by segment:
Source: Qualcomm
Note: Segment earnings exclude reconciling items.

Broadcom was able to pounce on Qualcomm because it is perceived as weakened by its battle with Apple and its allies. Broadcom’s proposed takeover price is about the same as Qualcomm’s share price a year ago. But it is possible Qualcomm’s weakened stake isn’t a temporary condition but a permanent one.

To be clear, Broadcom needs to sketch out how it plans to tackle Qualcomm’s challenges, especially the continuing battles over Qualcomm’s technology royalty fees. Those risks remain no matter who owns the company, but Qualcomm shareholders should demand answers from Broadcom before they decide whether to cash in their shares or give Qualcomm the green light to keep fighting. 

Broadcom’s takeover attempt is massive, messy and incredibly risky. But Qualcomm won’t have it easy as an independent company, either, and it may never get any better. 

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

To contact the author of this story:
Shira Ovide in New York at sovide@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net