The Broadcom-Qualcomm Takeover Attempt

On November 6, 2017, Broadcom Limited (NASDAQ: AVGO) unveiled a

proposal to acquire Qualcomm for $103 billion, which was made up of $60 per share in cash and $10 per share in Broadcom stocks. If debts were included, Qualcomm’s

enterprise value approximately reached to $130 billion. The proposal was quickly rejected by Qualcomm because of its belief in that the enterprise value was underestimated. To resolve the impasse, on December 4, 2017, Broadcom and its

supporting private equity firm, Silver Lake Partners, nominated 11 candidates to replace Qualcomm’s board of directors and pursued Qualcomm shareholders’ votes at Qualcomm’s 2018 Annual Meeting of Stockholders. On February 5, 2018, Broadcom made a $121 billion “best and final” offer to Qualcomm. This updated offer was

composed by $60 per share in cash and $22 per share in Broadcom stocks. The second offer was again dismissed by Qualcomm. On February 13, 2018, Broadcom conceded and proposed to reduce its slate of board nominees from 11 members to 6. On February 20, 2018, Qualcomm announced an amended agreement to increase the acquisition price for particular NXP stockholders. This decision disappointed Broadcom, and the

acquirer responded with an offer reduced to $57 per share in cash and $22 per share in

stocks. On February 27, 2018, Qualcomm changed its attitude and stated it would drop the objection if Broadcom’s offer was above $90 per share. On March 4, 2018, two days before the scheduled Qualcomm’s 2018 Annual Meeting of Stockholders, the

Committee on Foreign Investment in the United States (CFIUS) responded to Qualcomm’s secret and unilateral notice filed on January 29, 2018, which sought review of Broadcom’s attempt. The CFIUS stated it has identified potential national

security concerns and ordered Qualcomm to delay the meeting for at least 30 days.

Broadcom tried to re-domicile back to the United States to address the concerns. On

March 9, 2018, Qualcomm abruptly announced Paul E. Jacobs, the son of one Qualcomm’s founder Irwin M. Jacobs, will no longer serve as Executive Chairman of Qualcomm’s board of directors and will no longer serve in an executive management

capacity. The board also eliminated the role of Executive Chairman established since 2014 and believed an independent Chairman is more suitable for Qualcomm’s current situations. However, on March 12, 2018, President Trump signed an executive order to halt the proposed merger on the basis that the deal would threaten national security of the United States. Two days later, Broadcom announced it has terminated the offer to acquire Qualcomm and withdrawn its slate of independent director nominees for the election of Qualcomm’s board.

Broadcom Limited

Broadcom Limited is the successor to Avago Technologies Limited after the $37

billion merger between Avago and Broadcom Corporation, which was completed on February 1, 2016. Avago’s history can be traced back to the semiconductor division of

Hewlett Packard founded in 1961. In 1999, Hewlett Packard spun off all businesses not related to computers, storage, and imaging and these businesses became Agilent Technologies. In 2005, private equity firms Kohlberg Kravis Robert & Co. (KKR) and Silver Lake Partners acquired the semiconductor business of Agilent Technologies for

$2.6 billion and named the new company as Avago Technologies. The company went public in 2009 and didn’t stop its acquiring progress. In 2014, Avago acquired LSI

Corporation whose history could be dated back to LSI Logic and AT&T Bell Laboratories. After the acquisition of Broadcom Corporation, Avago changed its name to Broadcom Limited. In 2017, Broadcom Limited again acquired Brocade

Communications Systems. Therefore, the company has been gradually formed by a series of acquisitions. It’s a lineage of several U.S.-based companies.

Inheriting technologies from its diverse origins, Broadcom Limited delivers discrete devices, IC chipsets, and firmware for various applications such as communications, storage, automation, display & lighting, capacitive sensors, etc. It is a leading company in the networking infrastructure market and provides solutions for

both wired and wireless data communications. For wired data communications, Broadcom produces complex video processing ICs for cable, satellite, Internet Protocol,

and terrestrial set-top boxes. Broadcom’s broadband access products are widely used in modems, wireless local networks and residential gateways. Broadcom’s Ethernet

switching and routing technologies equip data centers and enterprises with networking capabilities, so digital data can be transmitted between numerous servers with low latency. As for wireless communications, Broadcom offers a broad variety of products covering radio frequency front end modules, power amplifiers, Wi-Fi controllers, Bluetooth, and global positioning system (GPS).

Broadcom Limited currently headquarters in Singapore and is planning to relocate its corporate back to the United States. The company hires around 14,000 employees across the globe (Broadcom, 2017). About 55% of the employees are located in North America, 38% in Asia, and 7% in Europe, the Middle East, and Africa. Broadcom outsources around three quarters of fabricating activities to Taiwan Semiconductor Manufacturing Company (TSMC) and the remaining one quarter to United Microelectronics Corporation, Semiconductor Manufacturing International Corporation, Global Foundries Inc., TowerJazz, and WIN Semiconductors Corporation.

Broadcom contracts with Advanced Semiconductor Engineering (ASE), Amkor Technology, Inc., Siliconware Precision Industries Co., Ltd. (SPIL), Inari Technology

SDN BHD, and Flextronics Telecom Systems, Ltd. for assembling and testing tasks.

However, Broadcom also owns manufacturing facilities in the United States and Singapore. The internal manufacturing facilities are mainly utilized for products requiring proprietary processes. Therefore, Broadcom operates at the mixture of fabless-foundry and IDM models.

Operating Segments

Broadcom has four diversified operating segments: Wired Infrastructure, Wireless Communications, Enterprise Storage, and Industrial & Other. The Wired Infrastructure segment mainly serves the telecommunications service markets controlled by monopoly or oligopoly telecommunications companies for each geographic area. Its television set-top box product line provides platform solutions for service providers

based on various transmission media to deliver video entertainments and networking capabilities in home environments. Besides, Broadcom’s broadband access ICs and

Ethernet switching products enable users to enjoy fast network connectivity via customer premises equipment (CPE). The Wired Infrastructure segment competes with several international semiconductor companies including Intel Corporation, NXP Semiconductors N.V., Quantenna Inc., STMicroelectronics N.V., MediaTek, Realtek Semiconductor, etc. Broadcom’s broad product portfolio allows the Wired

Infrastructure segment to differentiate itself by providing highly integrated and fully tested reference designs, so equipment manufacturers can efficiently shorten product development cycles and time to market.

The Wireless Communications segment supplies radio frequency devices and short to medium range wireless connectivity solutions for the mobile communications

market which is mainly dominated by a few international manufacturers. For example, Broadcom’s aggregate sales to Apple, Inc. alone accounts for more than 20% of total net revenue in the fiscal year 2017. Broadcom’s Wi-Fi IC chipsets are also popularly

employed to provide mobility for the customer premises equipment market, which is divided by the telecommunications service providers and several manufacturers targeting the retail sector. The Wireless Communications segment is gradually obsoleting standard discrete component products like diodes and transistors and focuses on products requiring advanced manufacturing processes or complex designs, so it can compete with other primary wireless solution providers like Qualcomm and Skyworks Solutions.

The Enterprise Storage segment produces stand-alone IC controllers and assembled printed circuit board (PCB) adaptors to transfer digital data between machines and storage devices with secure connections and high speed transmission.

These solutions are provided for original equipment manufacturers (OEMs) to develop

server and storage systems supporting mission critical storage traffic. Besides, the segment also assists hard disk drive (HDD) and solid state drive (SSD) OEMs in delivering greater density and capacity to meet the emerging demand for data storage.

The Enterprise Storage segment originally competes with Marvell Technology, Microsemi Corporation, and Texas Instruments. After expanding the business scope by acquiring Brocade Communications Systems, the segment also starts to compete with Cisco Systems in the fiber channel switch market.

Optical isolators, or optocouplers, are the feature products of the Industrial &

Other segment. Optocouplers can provide reliable isolation for signaling systems to be immune to electrical noise and interference. Optocouplers are required in wide variety of applications, such as automotive systems, factory automation and power generation

& distribution systems. Except for optocouplers, the Industrial & Other segment also generates optical transceivers and motion encoders for factory automation. In addition, the segment offers light emitting diodes (LEDs) for lighting and display applications.

The diversified product portfolio makes the Industrial & Other compete with companies of various backgrounds, such as Analog Devices, Cree, Inc., Hamamatsu Photonics, Heidenhain Corporation, Renesas Electronics, and Toshiba Corporation.

Financial Performance

Figure 8: Broadcom’s 2011-2017 Revenues and Year-over-Year Growth Rates

Source: Avago Technologies Limited and Broadcom Limited Annual Reports Form 10-K

Figure 8 shows Avago Technologies’ and Broadcom Limited’s revenue growth from 2011 to 2017. The company aggressively enlarges its size through M&A maneuvers. In 2014, revenues increased at an impressive rate of 69% mainly due to the acquisition of LSI Corporation and PLX Technology. Avago intensified its product portfolio from LSI with high-performance storage & networking chipsets and from PLX with interface connectivity solutions for semiconductor hardware and software. In 2015, the acquisition of Emulex Corporation, a provider of fiber channel host bus adaptors, further stimulated the growth of revenues. The acquisition of Broadcom Corporation dramatically boosted revenues for 2016 by 94% and for 2017 by 33%.

Broadcom Limited’s revenues are expected to keep growing significantly in the 2018

fiscal year because of the acquisition of Brocade Communications Systems in November 2017. By obtaining Brocade, Broadcom can enhance its leadership in fiber channel networking, internet protocol networking, and enterprise storage. In addition to rapid growth, Broadcom Limited also systematically transforms itself based on these M&A tactics. Figure 9 illustrates revenues of the four operating segments. The company puts more and more emphases on wired infrastructure and wireless communications. Besides, the company purposely enters the enterprise storage market.

In other words, through these serial acquisitions, Broadcom Limited deepens its involvement in the data communications and data management markets, so it can greatly gain dominance in the foundations of smart city and quickly snap the related opportunities.

However, bold approaches also represent risks. M&A measures exactly nourish Broadcom rapid growth and access to long-term potential, but they also result in volatility of short-term profitability. Figure 10 shows Broadcom Limited’s profitability from 2011 to 2017 fiscal years. The serial acquisitions since 2013 make ROE fluctuate dispersedly, with a range from 34% to -15%. The corresponding post-merger integration shrinks operating returns (i.e., RNOA). In addition, the company raised huge amounts of debts to fund the deals, so nonoperating returns are lifted significantly.

Figure 9: Broadcom Operating Segments’ Revenues from 2013 to 2017

Source: Avago Technologies Limited and Broadcom Limited Annual Reports Form 10-K

Figure 10: Broadcom Limited’s 2011- 2017 Profitability

Source: Avago Technologies Limited and Broadcom Limited Annual Reports Form 10-K