Broadcom CEO Says Qualcomm Doesn't Know World Has Changed: Q&A

  • Company raised its bid for biggest phone-chip maker by 17%
  • Hock Tan says Qualcomm’s business model needs to be ‘reset’

Broadcom Ltd. raised its bid for Qualcomm Inc. to about $121 billion, seeking to force the rival chipmaker to the negotiating table after Qualcomm rejected an earlier offer as too low.

The new price of $82 per share represents a 50 percent premium over where Qualcomm was trading on Nov. 2, before news of the approach broke, Broadcom said. This bid will be Broadcom’s “best and final” offer, according to a statement Monday. The deal would take the form of $60 in cash and the remainder in Broadcom shares. Qualcomm said it would review the new proposal before responding.

“Certainly it’s an offer that provides more value to the shareholders of Qualcomm than any standalone value that Qualcomm has tried or may think they can try to create," Broadcom Chief Executive Officer Hock Tan said in an interview on Monday. “We are asking the board of Qualcomm, and we believe any rational board would engage with us. And if they don’t, we want the Qualcomm shareholders to have the ability to elect our responsible slate of nominees who will then act in their best interests."

Here are some highlights of the conversation.

Q: Will the deal pass regulatory scrutiny?

A: We’ve looked at it hard, we’ve studied everything. There’s a very clear road map to completion. We wouldn’t have made this bid if we weren’t very comfortable.

We have identified potential regulatory concerns and we’ve offered very compelling, high-level commitments that should resolve those regulatory concerns.

To add further strength to that, if there’s any potential issue which we believe to be very unlikely, we will put in place a fair and appropriate reverse breakup fee for a deal of this size.

Q: Are customers OK with a bigger supplier?

A: There’s a lot of FUD [fear, uncertainty and doubt] out there.

We have to reset the business model. We would not have announced the transaction if we were not very confident that customers would embrace the proposed combination.

Q: Does Broadcom spend enough on research and development?

A: On the issue of innovation, that’s the second level of FUD that’s been thrown.

We probably out-innovate any competitors out there in the product lines that are core to Broadcom because we’re a technology-based company.

We focus on our core business and sort of stick to our knitting.

Basically our return on investment to shareholders, we believe, is far superior to what Qualcomm has been able to execute on their side.

In innovation, we both get to the same place.

Q: Why is Broadcom’s view of how to run a chip company better than Qualcomm’s?

A: Over these years you may start off as an IP licensing business, at the end of the day an IP licensing business is very hard to sustain.

It’s hard to be a patent troll forever.

You create more value for a customer by translating, embedding this technology you develop into silicon, hence semiconductor.

You can’t run a business this way where you’re constantly fighting with regulators and your practices are viewed as anti-competitive and two of your major licensing customers have decided they don’t want to pay you the money and are taking litigation.

That’s not a sustainable model.

Q: Why should Qualcomm not pay more for NXP?

A: Our view, as is Qualcomm’s, is that the $110 that Qualcomm has contracted to pay for NXP is a full and fair price.

We believe any increase by Qualcomm for NXP above the $110 would be a clear transfer of value from Qualcomm shareholders to NXP shareholders.

We do not agree with them that NXP will solve their problems as they laid out in January in their pie in the sky scenario. It won’t solve their problems. The problem is more intrinsic.

Q: What’s wrong with Qualcomm management’s view of the future direction of the chip industry?

A: It has matured.

The trouble is the people who run it. They’re still fighting yesterday’s battles.

Their revenue is virtually flat.

The world has changed. The engineers who run this business have not changed.

Engineers always feel they’re the smartest guys in the room. They can engineer themselves out of any problem.

I’m an engineer myself so perhaps I can say it.

The real world doesn’t work that way anymore.

They don’t see the real-world side of it, the business side of it, which is why you get into a fight with your biggest customers.

Nobody fights with their biggest customer.

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