Broadcom hit by friendly-fire in US/China trade war

Broadcom has unveiled its financial results for the last three months, though it isn’t the rosy picture some might have hoped for as ‘continued geopolitical uncertainties’ weigh heavy on the spreadsheets.

Although total revenues were up 10% from the same period of 2018 to $5.5 billion, the team has lowered its forecast for the remainder of the financial year. The new forecast for 2019 is now $22.5 billion, $2 billion lighter than the team was initially aiming for.

“We currently see a broad-based slowdown in the demand environment, which we believe is driven by continued geopolitical uncertainties, as well as the effects of export restrictions on one of our largest customers,” said CEO Hock Tan.

“As a result, our customers are actively reducing their inventory levels, and we are taking a conservative stance for the rest of the year.”

Although not mentioned here, guessing who Tan is referring to is not the most taxing of tasks. While Broadcom does not have as much exposure to Huawei as some US firms, it is its biggest customer; the unintended consequences (or at least we hope they were unintended) of President Trump’s Executive Order continue to pile up.

Estimates might vary, though the general consensus is that Huawei, the world’s largest manufacturer of telecoms equipment, purchases around $20 billion of semiconductors each year. Broadcom is being impacted here, though Qualcomm, Intel, Xilinx and several other smaller firms will also be feeling the pinch.

Although the year-on-year stats are still encouraging, investors might be a bit turned off by the sequential 4.7% decrease in revenues. Net income stood at $691 million, though this is not comparable to the year as this was the period Broadcom realised the benefits of changes to tax laws in the US.

The last couple of years have certainly been an interesting saga for Broadcom. Having shifted its HQ to the US in an effort to buy favour with authorities while attempting to acquire Qualcomm, the transaction was eventually blocked by the White House on the grounds of national security. With financials now being hit because of the anti-China mission of the Oval Office, Tan must be wondering why he bothered to cosy up with the US.

Broadcom buys CA Technologies as a $18.9 billion consolation prize

Broadcom announced it is going to acquire the software company CA Technologies in a $18.9 billion deal, after its proposed takeover of Qualcomm fell apart in March.

This deal gave CA Technologies a 20% premium on the closing price of the last trading day. Boards of both companies have agreed to the deal, though it still needs to gain the approval from the anti-trust authorities in the US, EU and Japan. It will also need to be voted on by all the shareholders, at least nominally.

We do not see any veto on the way from the authorities. CA’s position in the software industry is nowhere close to the criticality of Qualcomm in the chipset industry. The $4.2 billion revenues it made in 2017 would qualify it in the world’s top 20 software companies, while Qualcomm, which made $22.4 billion, was vying for the 4th place with Broadcom and SK Hynix on the table of the world’s largest semiconductor makers (trailing Samsung, Intel, and TSM).

It also lacks the leadership in innovation as Qualcomm. We believe the main concern behind the recommendation from US Committee on Foreign Investment to the President to block the deal was that they worried Broadcom would need to cut cost after the acquisition which would jeopardise Qualcomm’s investment in key R&D activities.

This deal does come as a surprise though. Despite Broadcom’s declared mission to acquire “mission critical technology businesses”, we have difficulty in seeing significant synergy between Broadcom’s chipset design business and CA, which offers cloud-based as well as conventional enterprise-level software. The attraction may lie in the “more than 1,500 patents worldwide” that CA holds.

The all-cash acquisition will be financed by Broadcom’s cash in hand as well as $18 billion debt to be issued. This will appear a small number to compare with the $106 billion it would need to borrow had the Qualcomm deal gone through.

Broadcom move to the US – a waste of time?

Broadcom’s decision to kick off a redomiciliation process to the US was a pragmatic move to get in the good books of the government, but now Trump has killed the Qualcomm acquisition, is there any point?

There are of course benefits to shifting the corporate headquarters to the tax shelter of Delaware, but then there are will also be benefits to having the corporation located in Singapore. This small city-state also offers corporates notable tax benefits, has an incredibly friendly business ecosystem, has 21 bilateral and regional Free Trade Agreements in force and 41 Investment Guarantee Agreements, excellent intellectual property protection laws and easy access to funding. When you take all this into account, some might assume the move to the US was nothing more than a shoulder rubbing exercise than a financial decision.

Broadcom announced plans to move its headquarters to the US prior to the beginning of the Qualcomm acquisition talk. Rumours were beginning to surface, but confirmation (and the beginning of the soap opera) was yet to arrive. The press conference announcing the redomiciliation process even managed to grab the attention of Trump, who was able to leave his Twitter account for a couple of minutes to stand stoically behind Broadcom CEO Hock Tan. At the time, Trump commented Broadcom was one of the “one of the really great, great companies.”

Considering the troubles being faced by AT&T during its own monster-acquisition, trying to get into the good books of the US government is not necessarily a bad idea, especially if you are about to kick off the biggest acquisition ever. Redomiciliation is of course an excellent way to do this as the President seems to be measuring success on how much money and corporations he can tempt back to American shores, but then he screwed over his new pal.

Tan must be looking at the situation now, assuming of course that pragmatism ahead of the acquisition was a driver for the redomiciliation, wondering what the point was. Why bother stroking the egos of shallow and polished politicians just to be cut down. This is the fifth time a President has blocked an acquisition after taking advice from the Committee on Foreign Investment in the United States, the second instance since Trump took office.

This is not to say the redomiciliation decision will be reversed. It might be a fair bet to assume Tan has the acquisition taste and might go chasing another, smaller US target. Perhaps the waves of repercussion won’t be as large this time meaning there won’t be as much scrutiny, but having the government on side will still certainly be a plus.

On a side note, perhaps we should not be surprised about Trump’s decision to ban the acquisition on the ground of paranoia protectionism patriotism national security, even if he seemed chummy with Tan. President Trump does not seem to be too bothered about offending if it achieves his own personal, short-term objectives. It will be interesting to see whether this approach to relationships comes back to bite in the future.

Broadcom officially throws in the towel

It was just a matter of time before Broadcom conceded defeat after Trump’s intervention and it decided not to drag things out any more than necessary.

In a short announcement Broadcom essentially said it had done everything the US President had demanded of it when he issued his Executive Order. There really didn’t seem to be any alternative once that decree was made so Broadcom wisely decided to throw in the towel early and get on with its life, pausing only to throw out a fairly tight-lipped parting shot.

‘Although we are disappointed with this outcome, Broadcom will comply with the Order,’ said the Broadcom statement. ‘Broadcom will continue to move forward with its redomiciliation process and will hold its Special Meeting of Stockholders as planned on March 23, 2018.

‘Broadcom’s Board of Directors and management team sincerely appreciate the significant support we received from the Qualcomm and Broadcom stockholders throughout this process.

Broadcom thanks the independent nominees who stood for election to the Qualcomm board, not only for their time and effort but also for their unwavering commitment to act in the best interests of Qualcomm stockholders.

‘Broadcom appreciates the following statement from U.S. Treasury Secretary and CFIUS chair Steven Mnuchin on March 12: “This decision is based on the facts and national security sensitivities related to this particular transaction only and is not intended to make any other statement about Broadcom or its employees, including its thousands of hard working and highly skilled U.S. employees.”’

Clearly Broadcom continues to believe the acquisition would have been in the best interests of Qualcomm shareholders. Even at the reduced $79 per share level that’s still a 32% premium on today’s opening Qualcomm share price, which fell by a few percent after the Trump intervention. It’s probably safe to assume that Broadcom will take great schadenfreude from any grief the Qualcomm board receives from investors in the coming weeks.

Checkmate – Trump tells Broadcom to leave Qualcomm alone

US President Trump is increasingly living up to his name by poking his nose into business deals, and has blocked Broadcom’s attempted acquisition of Qualcomm.

We previously reported that Qualcomm’s board seemed to have played a blinder by getting the Committee of Foreign Investment in the United States (CFIUS) involved in Broadcom’s hostile takeover bid for it. You didn’t have to be Niccolò Machiavelli to note that protectionism was a cornerstone of Trump’s Presidential campaign and, to be fair to him, he has followed through on that rhetoric.

The sudden stampede by various governmental agencies to be nice and protectionist and treat anyone who doesn’t have an American accent with sullen suspicion has served as a reminder of the power of patronage. If you want to keep your nice public sector position and maybe even get promoted, then you can do a lot worse than bang on about China stealing our jobs and generally playing dirty.

But it must surely have been beyond Qualcomm lobbyists wildest dreams for the Trumpmeister himself to decide to get involved. The US President has issued an Executive Order declaring “The proposed takeover of Qualcomm by the Purchaser is prohibited.” In the US an Executive Order is effectively an instant law, imposed by the President without having to bother with Congress, Senate, etc. It seems to be a legal fait accompli that is almost impossible to appeal.

The stated reasons for taking such strident action was that CFIUS advised Trump that the move “…might take action that threatens to impair the national security of the United States.” Furthermore Trump doesn’t reckon current law gives him sufficient authority to intervene, so he decided to play the Executive Order card.

On top of prohibiting the move the Order disqualifies any of the people Broadcom put forward for the Qualcomm board, which it was hoping Qualcomm shareholders would vote for at its AGM as their way of showing they approve of the acquisition bid, from standing for election. And just to make sure Qualcomm is also banned from accepting their nominations and CFIUS will be keeping a close eye on them both to make sure there’s no funny business.

And that, ladies and gentlemen, appears to be that. At time of writing Broadcom had restricted its response to the following statement: “Broadcom is reviewing the Order. Broadcom strongly disagrees that its proposed acquisition of Qualcomm raises any national security concerns.” It can review the order all it wants but short of going to legal war with Trump, it’s not obvious what options are available to Broadcom .

Scratching under the surface of the broad ‘national security’ issue reveals widespread concerns that Broadcom would have significantly cut back on R&D spend as part of its strategy to get maximum ROI from the acquisition. In turn it was feared that Chinese chip-makers such as MediaTek may have taken advantage of that.

There does seem to be some validity to this concern. Broadcom would have to borrow a silly amount of money to complete this acquisition as it does have a track record of aggressively cost cutting after an acquisition. Furthermore, if some reports from China are to be believed, even China Mobile had reservations about the potential loss of innovation resulting from the deal.

With Trump’s involvement, much of the commentary will now move in the inevitable partisan political direction. Buried under the noise will be some very legitimate questions around use of Executive Orders, what constitutes a national security threat and whether or not the US President has too much autonomy.

The delayed Qualcomm AGM has now been ordered to take place ASAP and it could get interesting. This whole situation seems to have been engineered by a Qualcomm board that didn’t fancy working under Broadcom, but there are bound to be Qualcomm investors who wanted to cash out. The board has won this game of M&A chess, but will now be under significant additional pressure to deliver value to its shareholders sharpish.

US officially flags Broadcom Qualcomm move as national security issue

Assuming its aim was to scupper Broadcom’s hostile takeover, the Qualcomm board seems to have played a blinder in getting the CFIUS involved.

The US Committee of Foreign Investment in the United States has written a public letter stating that, having had a bit of time to mull the matter over, it has concluded the whole thing looks far too dodgy by half and warrants a much closer look. Specifically it thinks the move could pose a risk to the national security of the US.

The main stated reason for this don’t seem to be any assumption that Singapore-based Broadcom would set about pillaging US state secrets the moment it got its hands on Qualcomm. Instead the CFIUS’s unease hinges on Qualcomm being a national champion in the areas of standard-setting and chip R&D and the apparent concern that it would be diminished in this respect once in the suffocating embrace of Broadcom.

Among the grounds for this fear are the assumption that Broadcom will have to cut back on R&D to pay down the $106 billion of debt it would have to take on to make the acquisition and some public statements from Broadcom that indicate it intends to adopt a ‘private equity’ strategy – i.e. cost-cutting. There is also concern that the supply of Qualcomm tech goodies to the US state may be affected by the move.

Inevitably Broadcom has whacked out a retaliatory PR entitled ‘Broadcom Pledges to Make the U.S. the Global Leader in 5G’. It contains load of promises, vows and oaths to spend loads on R&D, should it manage to acquire Qualcomm. But Broadcom’s announcements are starting to smack of reactive desperation as the political game turns against it.

In contrast to the casual geopolitical xenophobia of the ‘we don’t want our companies acquired by dodgy foreigners’ argument, the fear asset stripping on an unprecedented scale would appear to have a bit more substance. It’s not clear how long this full investigation will take but the smart money surely has to be on the whole thing being called off before long.

Qualcomm Broadcom descends from soap-opera to farce

One day the attempted acquisition of Qualcomm by Broadcom will be taught at business schools as an example of what happens when M&A goes bad.

The last time we checked in with these two wacky chippies we concluded the whole saga was just getting silly, after Broadcom decided to reaffirm its commitment to the acquisition by lowering its bid. Against all odds and reason, after taking a day or two off for MWC, the two of them have managed to raise the silly stakes by a further order of magnitude.

At the start of last week Broadcom issued a press release entitled ‘Broadcom’s Attempts at Genuine Engagement Met with Qualcomm’s “Engagement Theater”’. The release basically accused Qualcomm of acting in bad faith throughout the process, which is exactly the same claim as had been thrown in the other direction. A specific concern was that Qualcomm was trying to delay its AGM, at which Broadcom hoped to get a bunch of its people elected to the board. The AGM is due to take place around 24 hours from now.

Today Broadcom sent out another release entitled ‘Broadcom Disappointed Will of Qualcomm Stockholders to be Deferred’. It stated that ‘Qualcomm secretly filed a voluntary request with CFIUS [Committee on Foreign Investment in the United States] to initiate an investigation, resulting in a delay of Qualcomm’s Annual Meeting 48 hours before it was to take place.

The CFIUS is probably one of the organisations most responsible for things like Huawei being prevented from doing much business in the US. As we know the US has moved in a more isolationist direction under the Trump administration and Qualcomm is presumably aware of this. So, given the apparent hostility of the Qualcomm board to this bid it’s not too surprising to see them grass Singapore-based Broadcom to the CFIUS to further obstruct it.

Having said that Broadcom does seem to have some genuine grievance regarding the timing and secrecy of Qualcomm’s move. ‘It is critical that Qualcomm stockholders know that Qualcomm did not once mention submitting a voluntary notice to CFIUS in any of its interactions with Broadcom to date, including in the two meetings on February 14, 2018 and on February 23, 2018,’ says the release. ‘This can only be seen as an intentional lack of disclosure – both to Broadcom and to its own stockholders. This brings Qualcomm’s “engagement theater” to a new low.’

A further legitimate grievance comes from Broadcom’s insistence that it’s mainly American anyway (Broadcom is itself American but was acquired by Avago in 2015) and has made a public commitment to redomicile to the US anyway. So with that in mind why is the CFIUS poking its nose in anyway, especially since it presumably cleared the Broadcom acquisition in the first place, not to mention the Brocade acquisition. Broadcom concludes with its now familiar narrative that the Qualcomm board doesn’t have the best interests of its shareholders in mind.

Inevitably Qualcomm has published a response to all this Broadcom moaning. ‘Broadcom Limited’s response to the order from the CFIUS is a continuation of its now familiar pattern of deliberately seeking to mislead shareholders and the general public by using rhetoric rather than substance to trivialize and ignore serious regulatory and national security issues,’ it said.

‘Broadcom’s dismissive rhetoric notwithstanding, this is a very serious matter for both Qualcomm and Broadcom. Broadcom’s claims that the CFIUS inquiry was a surprise to them has no basis in fact. Broadcom has been interacting with CFIUS for weeks and made two written submissions to CFIUS.

‘In compliance with the CFIUS order, Qualcomm will delay its Annual Meeting of Stockholders and election of directors for at least 30 days so that CFIUS can fully investigate Broadcom Limited’s proposal to acquire Qualcomm.’

It’s hard to know who to believe here, but it probably doesn’t matter. The whole thing has degenerated into a public bitch-fest that is downright toe-curling. Unless the CFIUS blocks the deal the only people whose opinions matter here are Qualcomm shareholders. While neither board is coming out of this well, it’s hard to avoid the impression that the Qualcomm board it trying to rig the process in its favour and it runs the risk of alienating its shareholders in this sort of thing keeps up.

The Qualcomm M&A plot thickens with increased NXP bid

Chip giant Qualcomm has upped its bid for NXP in a bid to placate some investors and maybe complicate Broadcom’s attempted hostile takeover.

Qualcomm’s bid for NXP back in October 2016 was accepted by the NXP board, so you’d think that would be that. But there were some grumbles from institutional investors at the time and the NXP share price has improved a further 20% or so since the bid was announced, so Qualcomm decided to up the bid from $110 to $127.50, which equates to around $6 billion.

A possible by-product of this move may be to complicate Broadcom’s hostile acquisition, which was originally based on the original NXP purchase price. Qualcomm’s board is clearly not keen on the Broadcom move and, with only China left to approve the move, presumably thinks it has an even stronger argument in favour of remaining independent with NXP on board.

“Qualcomm’s leading SoC capabilities and technology roadmap, coupled with NXP’s differentiated position in Automotive, Security and IoT, offers a compelling value proposition,” said Steve Mollenkopf, Qualcomm CEO. “With only one regulatory approval remaining, we are working hard to complete this transaction expeditiously. Our integration planning is on track and we expect to realize the full benefits of this transaction for our customers, employees and stockholders.”

“The acquisition of NXP will enable us to accelerate our growth strategy,” said Tom Horton, Presiding Director of the Qualcomm Board. “The Board unanimously believes this is an attractive acquisition at this price for Qualcomm stockholders based on NXP’s recent strong financial performance, the growth in key strategic areas such as Auto and IoT and our high confidence in management’s ability to execute upon the synergy opportunities.”

Paying more for NXP may put off Broadcom if it doesn’t think Qualcomm is getting good value for money, but that in turn may antagonise existing Qualcomm shareholders, especially the ones tempted by Broadcom’s offer. The balancing act continues and Broadcom’s next move may be critical.

Qualcomm board walks a tightrope after Broadcom meeting

Having rejected its significantly improved acquisition offer Qualcomm met Broadcom to look for common ground, but they don’t seem to have made much progress.

The Qualcomm board has always had two main public objections to Broadcom’s overtures: price and regulatory concerns. The first bid was universally viewed as too low but then Broadcom came back with a significantly improved one a couple of weeks ago.

It seems like the Qualcomm senior management don’t fancy being owned by Broadcom at any price but, as a public company, it’s ultimately not their decision alone. The first professional obligation of the Qualcomm board is to generate value for its shareholders and the improved offer put pressure on it to demonstrate why investors should turn down $82 per share when their shares are currently trading at $65.

The main narrative regarding value seems to rest on 5G and diversification. ‘Just wait until 5G kicks in,’ seems to be the Qualcomm message, because it has significant modem leadership and is well positioned to exploit all the associated opportunities expected to crop up around IoT, low-latency wireless, etc.

This is simply a call to speculation. Just imagine how high the share price will go when we’re not only selling ships into the telecoms channel, but pretty much every other industry too! That’s a strong narrative, but requires a pretty significant leap of faith. Never in its entire history, even at the peak of the dotcom bubble, has Qualcomm’s share price been much over $82, although it did touch $80 as recently as 2014.

The regulatory message seems more compelling. Such is the size of this acquisition, and the amount of component power it would consolidate, that every regulatory body in the world be taking a long, hard at it. The Qualcomm board is saying that, such is the high probability of the deal being blocked, it’s against its shareholders’ interests to go through all the distraction and disruption of going through the process.

This matter seems to have been the main focus of the meeting between the boards of the two companies that took place after the rejection of the $82 bid. You can see the letter the Qualcomm board wrote to the Broadcom boss after the meeting, which thanks him for suggesting a few things but ultimately lamenting that he didn’t go nearly far enough.

This provides the basis for rejecting the acquisition at any price but surely, at some level, investors will decide the potential reward is worth the regulatory risk. Broadcom has yet to publicly respond to the Qualcomm letter, but at least one shareholder advisory firm has said it thinks the Qualcomm board should do more to find some common ground.

Broadcom is likely to ramp up its direct lobbying of Qualcomm shareholders now, probably indicating it doesn’t think the incumbent board is acting in their best interests. The Qualcomm board will probably respond by reiterating its ‘just wait for 5G’ and ‘it will never be approved anyway’ arguments and the debate will culminate at the Qualcomm AGM in early March, when Broadcom will try to get a bunch of its people on the Qualcomm board. Should be fun.



February 16, 2018

Mr. Hock Tan

President and Chief Executive Officer

Broadcom Limited

1 Yishun Avenue 7

Singapore 768923


Dear Mr. Tan,

I am writing on behalf of the Board of Directors of Qualcomm Incorporated.  In our February 14 meeting, Broadcom reiterated that $82.00 per share is its best and final proposal.  The Board remains unanimously of the view that this proposal materially undervalues Qualcomm and has an unacceptably high level of risk, and therefore is not in the best interests of Qualcomm stockholders.

That said, our Board found the meeting to be constructive in that the Broadcom representatives expressed a willingness to agree to certain potential antitrust-related divestitures beyond those contained in your publicly filed merger agreement.  At the same time, Broadcom continued to resist agreeing to other commitments that could be expected to be required by the FTC, the European Commission, MOFCOM and other government regulatory bodies. Broadcom also declined to respond to any questions about its intentions for the future of Qualcomm’s licensing business, which makes it very difficult to predict the antitrust-related remedies that might be required.  In addition, Broadcom insists on controlling all material decisions regarding our valuable licensing business during the extended period between signing and a potential closing, which would be problematic and not permitted under antitrust laws.

Our Board is highly cognizant of the need to protect Qualcomm’s stockholders from the considerable risks of agreeing to a transaction that does not close.  A breakup fee in the range proposed by Broadcom does not come close to compensating for those risks.

While the current Broadcom proposal is unacceptable, our Board is intensely focused on maximizing value for Qualcomm stockholders, whether through executing on its growth strategy or by selling the Company. Our Board is open to further discussions with Broadcom to see if a proposal that appropriately reflects the true value of Qualcomm shares, and ensures an appropriate level of deal certainty, can be obtained. If such a proposal cannot be obtained from Broadcom, our Board is highly confident in Qualcomm’s ability to deliver superior near- and long-term value to its stockholders by continuing to execute its growth strategy.


Paul E. Jacobs

Chairman of the Board


cc: Steve Mollenkopf

Chief Executive Officer