The semiconductor sector looks set for further consolidation with the confirmation that Broadcom, a leading semiconductor device supplier to the wired, wireless, enterprise storage, and industrial end markets, proposes to acquire all of the outstanding shares of technology company Qualcomm for per share consideration of $70.00 in cash and stock in a transaction valued at $130 billion (€112bn).
In October 2016, Qualcomm and NXP Semiconductors announced a definitive agreement, unanimously approved by the boards of directors of both companies, under which Qualcomm would acquire NXP, representing a total enterprise value of approximately $47 billion.
Under Broadcom’s proposal, the $70.00 per share to be received by Qualcomm stockholders would consist of $60.00 in cash and $10.00 per share in Broadcom shares. Broadcom’s proposal represents a 28 per cent premium over the closing price of Qualcomm common stock on November 2nd, 2017, the last unaffected trading day prior to media speculation regarding a potential transaction, and a premium of 33 per cent to Qualcomm’s unaffected 30-day volume-weighted average price.
The Broadcom proposal stands whether Qualcomm’s pending acquisition of NXP Semiconductors is consummated on the currently disclosed terms of $110 per NXP share or the transaction is terminated. The proposed transaction is valued at approximately $130 billion on a pro forma basis, including $25 billion of net debt, giving effect to Qualcomm’s pending acquisition of NXP on its currently disclosed terms.
“Broadcom’s proposal is compelling for stockholders and stakeholders in both companies. Our proposal provides Qualcomm stockholders with a substantial and immediate premium in cash for their shares, as well as the opportunity to participate in the upside potential of the combined company,” said Hock Tan, President and Chief Executive Officer of Broadcom. “This complementary transaction will position the combined company as a global communications leader with an impressive portfolio of technologies and products. We would not make this offer if we were not confident that our common global customers would embrace the proposed combination. With greater scale and broader product diversification, the combined company will be positioned to deliver more advanced semiconductor solutions for our global customers and drive enhanced stockholder value.”
Tan continued, “We have great respect for the company founded 32 years ago by Irwin Jacobs, Andrew Viterbi and their colleagues, and the revolutionary technologies they developed. Following the combination, Qualcomm will be best positioned to build on its legacy of innovation and invention. Given the common strengths of our businesses and our shared heritage of, and continued focus on, technology innovation, we are confident we can quickly realize the benefits of this compelling transaction for all stakeholders. Importantly, we believe that Qualcomm and Broadcom employees will benefit from substantial opportunities for growth and development as part of a larger company.”
Thomas Krause, Broadcom Chief Financial Officer, added, “The Broadcom business continues to perform very well. Broadcom has completed five major acquisitions since 2013, and has a proven track record of rapidly deleveraging and successfully integrating companies to create value for our stockholders, employees and customers. Given the complementary nature of our products, we are confident that any regulatory requirements necessary to complete a combination with Qualcomm will be met in a timely manner. We look forward to engaging immediately in discussions with Qualcomm so that we can sign a definitive agreement and complete this transaction expeditiously.”
According to Broadcom, the proposed transaction:
The combined company is expected to have an investment grade credit rating and strong cash flow generation to facilitate rapid deleveraging.
In a letter to the Board of Directors of Qualcomm, Hock Tan, President and Chief Executive Officer of Broadcom, suggested the proposal would provide Qualcomm stockholders with an immediate, substantial and compelling premium to the value that would be achievable by Qualcomm on a standalone basis, as well as the opportunity to participate in the upside potential of the combined company.
“As you know from prior discussions between our two companies, Broadcom has been interested for some time in combining Qualcomm’s mobile business with the Broadcom platform. We continue to believe that such a combination will deliver substantial benefits to our respective stockholders, employees, customers and other stakeholders. We are hopeful that you will agree that the proposal we outline in this letter presents a compelling opportunity for Qualcomm stockholders to realise both present and future value for their Qualcomm shares,” he wrote.
He suggested there was “significant” strategic, financial and operational rationale for the proposed transaction. “A combination of Qualcomm and Broadcom will create a strong, global company with an impressive portfolio of industry-leading technologies and products. Given the highly complementary nature of our businesses, we are confident that our global customers will embrace the proposed combination as we work strategically with them to deliver more advanced value-added semiconductor solutions,” he added.
“We believe that our proposal represents the most attractive, value-enhancing alternative available to Qualcomm stockholders, and that it is in the best interests of both parties to proceed as soon as possible to reach agreement on a transaction structure and terms,” he concluded, while conforming that Broadcom was ready to devote all necessary resources to finalise all documentation on an expeditious basis.
In a Statement, Qualcomm confirmed receipt of what it described as an “unsolicited” proposal from Broadcom.
“Qualcomm Incorporated today confirmed that it has received a non-binding, unsolicited proposal from Broadcom Limited to acquire all of the outstanding shares of Qualcomm for per share consideration of $60.00 in cash and $10.00 in Broadcom stock. The Qualcomm Board of Directors, in consultation with its financial and legal advisors, will assess the proposal in order to pursue the course of action that is in the best interests of Qualcomm shareholders. Qualcomm will have no further comment until its Board of Directors has completed its review,” it stated.
“Qualcomm’s Board and management have continued to execute on its strategy to position the company for the next phase of profitable growth by making focused investments to extend its leadership in mobile into new opportunities, while maintaining financial discipline and a robust capital return program. Qualcomm has significant opportunities to drive substantial additional value for its shareholders as its technology and product roadmap move into new industries,” it added.
According to Geoff Blaber, VP Research, Americas, CCS Insight, the Broadcom bid was the direct result of Qualcomm’s share price dip in the wake of regulatory pressure and disputes with Apple.
“Despite a wave of semiconductor industry consolidation, the market is not yet settled as companies seek new product growth, scale and a diversified set of products and intellectual property.”
“This approach from Broadcom is fraught with challenges and in its current form is highly unlikely to proceed.”
“Qualcomm is likely to resist primarily on the basis that it undervalues the company and its growth opportunity in IoT. It is an unwelcome distraction for Qualcomm as it seeks to close the NXP acquisition, negotiate with regulators and work through the ongoing dispute with Apple.”
“Other central factors are the complexity of integration, particularly large proposed acquisitions for both companies that are still to compete (NXP and Brocade). Similarly, regulatory scrutiny is likely to be substantial and would add up to make this a highly risky transaction,” he advised.