Broadcom Proposes to Buy Qualcomm for $103 Billion -- 2nd Update

By Ted Greenwald Features Dow Jones Newswires

Broadcom Ltd. made an unsolicited $105 billion takeover bid for Qualcomm Inc., the chip industry's boldest bet yet that size will equal strength at a time of technological upheaval.

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The approach, which would mark the biggest technology takeover ever, is an opportunistic move by Broadcom Chief Executive Hock Tan to grab a rival after a year of setbacks has left Qualcomm vulnerable. It is also a recognition of the value of Qualcomm's wireless chips and related technology at a time when cellular communications are increasingly at the center of computing.

Mr. Tan already has used acquisitions to build Broadcom into the fourth-biggest chip company by market value, part of a larger wave of industry consolidation driven by falling chip prices.

The Qualcomm deal is far from certain, however. Qualcomm, which said it would consider the proposal, is expected ultimately to rebuff it on the grounds that the price isn't high enough, especially given the significant risk that regulators would block it, according to some analysts. Under typical circumstances, unfriendly bids like this are difficult to pull off; given the sheer size and complexity of Qualcomm, this one could be especially challenging, analysts said Monday.

Broadcom offered $70 a share for Qualcomm, representing a 28% premium from its closing price on Thursday -- before news reports on the expected approach.

The cash-and-stock deal carries a value of roughly $105 billion, according to Broadcom, not including about $25 billion of net debt at Qualcomm.

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Qualcomm shares rose 3.5% to $64 in premarket trading while Broadcom shares were 1.5% higher at $277.77.

Qualcomm was riding high as recently as a year ago after unveiling the chip industry's largest-ever acquisition: a $39 billion proposed deal for NXP Semiconductors NV. The deal hasn't closed yet and Broadcom said Monday that its proposal would stand regardless of whether Qualcomm's proposed acquisition of NXP is consummated under the current terms.

Since then, a string of hits by regulators competitors and customers including Apple Inc. has left the industry titan in a vulnerable position. Qualcomm's profit in the fiscal year that ended Sept. 24 plummeted 57%, and its share price declined 18% in the 12 months through Thursday's close compared with a 58% rise in the PHLX Semiconductor Sector Index. That was before news of Broadcom's interest sent Qualcomm shares up nearly 13% on Friday.

The possible Broadcom takeover is likely to face intense regulatory scrutiny since the companies are both leaders in Wi-Fi and Bluetooth technology. Qualcomm already has been under pressure from antitrust agencies in several jurisdictions, including the U.S. The company has paid hefty regulatory fines in China, South Korea and Taiwan.

In other ways, Broadcom and Qualcomm have largely complementary product lines. Qualcomm is the market leader in chips that manage wireless communications in smartphones and owns patents on technology essential to implementing cellular-communications standards, which allows it to collect a royalty on nearly every smartphone sold world-wide.

For its part, Broadcom, which was bought by Avago Technologies Ltd. in 2015 for $39 billion, sells a diverse line of equipment for networking and communications -- including technology for smartphones from Apple Inc. and Samsung Electronics Co.

The blows have come thick and fast for Qualcomm. South Korea's competition regulator in December fined the company $853 million for anticompetitive behavior, and its Taiwanese counterpart last month followed with a $773 million fine. The U.S. Federal Trade Commission in January sued the chip maker in a case that is pending.

Days after the FTC suit, Apple, one of Qualcomm's biggest customers, sued Qualcomm claiming unfair patent-licensing practices. Apple has stopped paying royalties that analyst Stacy Rasgon with Bernstein Research estimates to be $2.5 billion annually, and the Journal reported recently that Apple could jettison Qualcomm chips from iPhones and iPads next year, threatening an estimated $2 billion or so more in annual chip sales for Qualcomm.

Another licensee, which Qualcomm hasn't identified, stopped paying $1 billion in royalties annually. Qualcomm lost a string of legal bids to shake off lawsuits and restore payments.

Mr. Rasgon likens Qualcomm's challenges to the game Whac-A-Mole. "Every time you feel it's fixed, something else pops up," he said. "The deterioration that it has brought is what potentially opens up the opportunity for Broadcom."

Qualcomm Chief Executive Steve Mollenkopf, in a call with investors last week, pointed to recent moves to expand Qualcomm's market, including the NXP Semiconductors deal and a partnership with Microsoft Corp. to produce Qualcomm-driven laptops.

A Qualcomm spokesman on Sunday declined to comment further.

The NXP deal, announced in October 2016, is supposed to bolster Qualcomm by giving it the top developer of chips for automobiles, but it faces continued regulatory scrutiny and pressure from activist investors for a higher price. The deal was to close this year, but Mr. Mollenkopf last week acknowledged that it could slip to 2018.

--Imani Moise contributed to this article.

Write to Ted Greenwald at Ted.Greenwald@wsj.com

(END) Dow Jones Newswires

November 06, 2017 14:18 ET (19:18 GMT)