Wall Street cheers amid Qualcomm bid, but others question his approach to R&D
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This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (January 26, 2018).
In the innovation-obsessed technology industry, Broadcom Ltd. Chief Executive Hock Tan unapologetically favors surefire profits over visionary projects.
Through a series of increasingly bold acquisitions, followed by fiscal discipline and tightly controlled investment, Mr. Tan, the chip industry's most visible deal maker, has been helping drive profit growth at Broadcom, piling up cash and paying out dividends at a prodigious pace.
Mr. Tan's approach brings kudos from Wall Street, but it doesn't always sit well with his former employees or current customers of his latest deal target, the chip maker Qualcomm Inc. -- particularly those who think he skimps on research and development.
In an interview with The Wall Street Journal, Mr. Tan defended the methods he used to transform a company once valued at $2.7 billion, Avago Technologies Ltd., into the $105 billion juggernaut known as Broadcom.
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"It's about putting together a very good portfolio of product franchises to create a lot of value for our customers, shareholders and employees," Mr. Tan said. "There's no long-term vision or ambition other than that."
In Broadcom's fiscal year that ended in October, Mr. Tan boosted revenue by 33%, profit by 39% and free cash flow by 58%, according to S&P Global Market Intelligence. He doubled Broadcom's per-share dividend for 2017 and raised it a further 72% for 2018.
Mr. Tan owns a 0.026% equity stake in Broadcom worth $28.1 million, according to Capital IQ. He also has the right to exercise options to purchase more than 2.4 million shares by mid-March, according to a recent Securities and Exchange Commission filing, worth hundreds of millions of dollars.
Wall Street is eating it up. In the past five years, Broadcom shares have expanded more than sevenfold, while the PHLX Semiconductor Index more than tripled.
A relentless drive to build his company leaves Mr. Tan with little room for anything else, friends and associates said, although he has a taste for richly marbled Wagyu beef and high-performance cars. He commutes to San Jose, Calif., from San Mateo, Calif., in a Tesla, usually leaving his Aston Martin in the garage.
Mr. Tan, who came to the U.S. from Malaysia in 1971 at age 18, held senior executive roles at tech and other companies before he was named CEO of Avago in 2006. Since then, he has built Broadcom's portfolio of smartphone and networking chips through a nearly $50 billion shopping spree for a dozen companies with as many divestments.
If he has his way, his roster soon will include market-leading products from Qualcomm, a longstanding innovator that has lately been beset by challenges from customers, primarily Apple Inc., and regulators around the world.
Broadcom and Qualcomm have been locked in a standoff since early November, when Mr. Tan bid $105 billion to combine the two companies, an offer Qualcomm rejected. A merger would be the largest-ever tech tie-up, giving Broadcom chips that connect smartphones to cellular networks and forging the No. 3 semiconductor company by revenue. Qualcomm shareholders are set to vote on Broadcom-nominated directors at Qualcomm's annual meeting in March.
The companies take markedly different approaches to the chip business. Qualcomm, a San Diego smartphone specialist, is working to expand into laptops, servers and new fields such as virtual reality. It was first to dedicate computing power to artificial intelligence in mobile processors and has played a central role in forming the next-generation cellular standard known as 5G. Its proposed purchase of NXP Semiconductors NV, which it expects to complete early this year, would open a path into the emerging market for self-driving cars.
Mr. Tan, on the other hand, views Broadcom as a high-performance chassis into which he can bolt purchases of established products that have leading technology and market share, with an emphasis on those that appeal to his current customer base. He is a relentless cost-cutter, spending primarily to maintain his lead and avoiding investments that don't have a clear payoff.
Syed Ali, chief executive of chip maker Cavium Inc., which both competes and collaborates with Broadcom, lauded Mr. Tan for his rapid-fire decision-making and command of operational details. "I hate competing against him," Mr. Ali said.
Mr. Tan's attitude toward innovation, though, worries some Qualcomm customers that depend on its technology to give them an edge.
Executives at Chinese handset makers Oppo Electronics Corp. and Vivo Electronics Corp., recently expressed concern that Broadcom might trim Qualcomm's R&D spending on fundamental cellular technology. Broadcom's options are either to raise Qualcomm's prices or cut its costs, a Vivo executive said. "Either choice will pose disadvantages for us."
Wang Xiang, senior vice president of strategic cooperation at Xiaomi Corp., another mobile-phone maker, said he was evaluating the implications of a Broadcom-Qualcomm tie-up. "I think we care more if the technology partner is motivated enough to do technology innovation," he said.
Mr. Tan, in his dozen years as CEO, has spent six times as much on acquisitions as on R&D, while in that period Qualcomm spent nowhere near as much on acquisition as on R&D, according to data from Broadcom, Qualcomm and S&P Global Market Intelligence. In the past 12 months, Broadcom spent 19% of revenue on R&D, while Qualcomm spent 25%.
Mr. Tan has said he has heard from many Qualcomm customers who support his proposed merger. He said he believes he spends more than necessary to maintain leadership in his core "franchises." "Frankly, we overinvest to ensure we are way ahead of No. 2 or No. 3," he said.
Some former Broadcom employees worried Mr. Tan's strategy would prove unsustainable in the long run. One former executive said his targets' R&D investments, made before being acquired by Broadcom, often take years to bear fruit -- so if Broadcom doesn't continue to invest at the same level, it must keep buying ever-larger companies to achieve its target margins.
Mr. Tan said he acquires only companies that offer opportunities to drive growth and profit.
A former employee of Broadcom's wireless division said Mr. Tan stifled innovation by cutting products that weren't already established leaders and by skimping on product development unless a customer requested a new capability -- and agreed to pay for it.
"The everyday question was: How long can we go on like this?" the former employee said.
Mr. Tan calls that "a classic engineer's biased view" -- that the engineer's own solution is best. He credited Broadcom's ability to spot winning projects with keeping R&D spending down.
Broadcom is "as innovative as the next guy," he said. "It's great to innovate -- I have full respect for that -- but it's also great to get a return on all the innovation and all the investment you make."
Write to Ted Greenwald at Ted.Greenwald@wsj.com
(END) Dow Jones Newswires
January 26, 2018 02:47 ET (07:47 GMT)