On November 6, 2017, Broadcom made official the rumored offer to acquire Qualcomm for a staggering $130 billion. This would be the largest semiconductor deal on record, and would create the third largest semiconductor company in revenue terms, behind Intel and Samsung.
Strategy Analytics takes the position, at least at this early stage, that this deal makes little sense:
- Broadcom is the smaller of the two firms, especially if the acquisition of NXP Semis by Qualcomm goes through. This raises concerns that Broadcom’s intent is purely financial, to acquire Qualcomm, keep a few parts it wants, and discard the rest.
- Qualcomm is undervalued. Despite Qualcomm’s legal battles with Apple and various regulatory bodies, Qualcomm’s chip unit (QCT) has performed well of late, and the company has had some initial successes in expanding in smartphones and beyond into promising IoT markets. The stock price, by historical measures, appears to be undervalued at around $55 at the moment:
- The acquisition price does not appear to do justice to Qualcomm’s IP, claimed to total more than 130,000 patents and patent applications, much of it related to future opportunities in IoT and 5G. Qualcomm has established a relatively safe lead in cellular processors and radio chipsets, and has pioneered and leads in 5G.
- Qualcomm has expanded its smartphone chip portfolio to capture more value in phones with antenna tuners, envelope tracking, Quick ChargeTM, and the RF 360 Holdings JV front-end modules. Qualcomm has also improved its processors with features too numerous to list here, including new software for image recognition and artificial intelligence. In contrast, Broadcom exited the cellular chipset market a year ago, and has been relatively inactive in 5G, at least publicly.
- The deal will face close scrutiny from regulators around the world, especially as it involves Qualcomm. The combined company will have perhaps unassailable share in overall smartphone chip content including cellular processors, RF and connectivity chips.
One potential deal breaker is that together Qualcomm + Broadcom would have more than 50 percent share of the Wi-Fi chip market, raising anti-trust concerns and the possibility that either Qualcomm or Broadcom could be forced by regulators to sell its Wi-Fi product lines, related assets and IP.
Case in point, NXP Semis was forced to sell off its base station RF power transistor business to avoid very high market share (> 75 percent) that would have resulted from the combination with Freescale’s RF Power business. The former NXP RF Power business unit became Ampleon, now owned by a Chinese investment consortium. NXP Semis has continued offering the former Freescale LDMOS and GaN RF Power transistor products for base stations.
If something like this occurs with the Qualcomm-Broadcom deal, it might benefit an acquiring company or government-backed entity in China, but perhaps not US jobs or technology leadership.
For more details and opinions on the Qualcomm-Broadcom deal, see this blog by the Strategy Analytics Handset Component Technologies practice.