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Broadcom has been interested in acquiring Qualcomm for more than a year

Mike Freeman, The San Diego Union-Tribune on

Published in Business News

SAN DIEGO -- Broadcom's interest in acquiring Qualcomm apparently wasn't solely triggered by the San Diego company's lagging stock price this year.

Broadcom CEO Hock Tan brought up combining the two companies with Qualcomm in August 2016, when Qualcomm's shares traded at significantly higher prices.

That's according to a letter that Tan sent to Qualcomm's board of directors Monday making his $103 billion buyout offer.

"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," Tan wrote to Qualcomm's board. "We continue to believe that such a combination will deliver substantial benefits to our respective stockholders, employees, customers and other stakeholders."

Qualcomm is evaluating the offer and declined to comment. Broadcom was unavailable for comment.

It's uncertain whether Broadcom can pull off such a large, complex acquisition. Qualcomm likely will deem this initial offer as too low, analysts say. Broadcom said it believes the transaction would be completed within 12 months if the companies can come to an agreement.

The deal could create a semiconductor colossus with $51 billion in annual revenue and $22 billion in profit after cost cuts and Qualcomm's pending acquisition of NXP Semiconductors.

Broadcom's bid had been seen by analysts as an offensive move that takes advantage of Qualcomm's lagging stock price, which was down 18 percent over the trailing 12 months before Broadcom's takeover offer.

"We aren't sure Qualcomm's management team would be so eager to sell, but we suspect investors would be significantly more pliable," Stacy Rasgon, an analyst with Bernstein Research, said in a written report.

Qualcomm's shares have been weighed down by its nasty legal battle with Apple over patent royalties, fines from antitrust regulators and slow progress on its planned $38 billion acquisition of NXP.

Meanwhile, Broadcom's shares are surged nearly 50 percent in the past 12 months as it completed the Broadcom-Avago Technologies acquisition, paid down debt and increased revenue and profit.

Broadcom's offer represents a 28 percent premium over Qualcomm's stock price on Thursday, the day prior to news leaking about a potential offer.

A Broadcom-Qualcomm deal would not be contingent on Broadcom getting financing. The company said it expects to maintain an investment-grade debt rating and has received "highly confident" letters from investment bankers on debt issuance to fund the deal.

In addition, private equity firm Silver Lake Partners has pledged $5 billion convertible debt to jump-start financing.

Broadcom said its offer stands whether or not Qualcomm completes the pending purchase of NXP Semiconductors.

Wall Street analysts say a deal could face problems with regulators, and Qualcomm's board is likely to view it as under-estimating its potential in upcoming 5G wireless networks and the expansion of cellular technology into automotive, health care and other industries.

But Qualcomm's depressed stock price opens the door for Broadcom to win support from Qualcomm's shareholders, including institutional investors that might deem Broadcom's offer less risky than waiting for Qualcomm's disputes with Apple and antitrust regulators to be resolved.

"Qualcomm management will and should fight like hell not to be acquired," said Steven Re of Fairbanks Capital Management in Rancho Santa Fe. "But Qualcomm's management better think realistically. They are between a rock and a hard place."

Broadcom has grown through several acquisitions, and has a history of selling business units it deems nonessential. With Tan in charge, it's also known for keeping a lid on costs. Analysts estimate that it could wring out $1 billion to $2 billion in annual costs from the Qualcomm deal.

Jim McGregor of industry advisory firm Tirias Research, thinks Broadcom's offer sets up a proxy fight for control of Qualcomm's board. The company typically holds its annual shareholders meeting in the spring.

"I don't think management wants (to be acquired) and I don't think this is good for Qualcomm, but we have seen odder things happen," McGregor said. "It's kind of perfect timing. Their stock is down. A number of board members are up for election or re-election. From a strategic standpoint, Broadcom couldn't have planned this better."

(c)2017 The San Diego Union-Tribune

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