Currently, Broadcom and Qualcomm are firing broadsides at each other. These broadsides are looking less like a marriage and more like a relationship that has gone sideways even before the first date. The Chinese government appears to be behind the scenes helping/hurting Broadcom (China has been aggressively attempting to seize control of the technology market from the U.S. for some time) by slowing Qualcomm’s own, and far more friendly, acquisition of NXP.
Given the acrimony growing between the firms, this attempted shotgun wedding is looking less and less like a clever idea and increasingly like a train wreck.
Let me explain.
The Science of a Hostile Takeover
Mergers at the scale of one anticipated by the Broadcom/Qualcomm merger are rarely successful. There are simply too many moving parts and by the time the merger is done, too much damage, to preserve the asset that was acquired. And this is when both companies actually want to merge. There are exceptions to this rule, most notably the Dell/EMC merger, but what made that merger unique was a combination of strong merger process, deep respect between the companies, Dell being private (avoiding much of the cost), and a merger team that started early and executed exceptionally well.
But the Broadcom/Qualcomm merger is a hostile merger and those are nearly impossible to pull off. The reason is because the acquired company is valued as a company and not a collection of IP assets and the merger process drives human assets from the company, leaving a shell worth a fraction of what the company was worth. The best example of when this did work was Oracle/Peoplesoft, and in that case, Oracle simply wanted to eliminate a competitor and therefore the destruction of most of the value of the asset was factored in.
Broadcom is behaving like the destruction of Qualcomm as a viable entity is part of the plan, though many of my peers just can’t make the numbers work.
Apple/Intel, Hedge Funds and Governments
What makes this all fascinating is that behind the scenes, an unprecedented number of players are affecting this effort. We have the litigation between Qualcomm and Apple/Intel, which is weird. What makes it weird is that Intel appears to think that by helping Apple drive down Qualcomm prices, it will gain an advantage, but since its only value is as a lower cost, lower performing, alternative to Qualcomm’s modems, the result would be more aggressively priced better alternatives to Intel’s offerings from Qualcomm/Broadcom, wiping Intel out of the market.
On paper, this is a lose/lose for Intel and even for Apple. The lower prices would flow to Apple competitors as well, lowering the price of competing phones. So, Apple would not get a lasting benefit either. But many of us believe that Apple has cut some kind of side deal with Broadcom so this wouldn’t happen, otherwise none of this would make sense. But that side deal would appear to represent an unfair trade practice under U.S., and international, law, making the enforceability of that deal very questionable.
China is under a lot of U.S. regulatory scrutiny now. Broadcom has indicated that it plans to move its headquarters from Singapore to the U.S. to appease U.S. regulators, but this moves against China’s own interests and it is already acting as a disruptor. It is almost certain that neither the U.S. nor China will be very happy with this merger, either blocking or significantly limiting it.
Finally, and this is one of the reasons Dell went private in the first place, stock ownership in the U.S. is with hedge funds now. Hedge funds are very tactical. They could not care less about the long-term survivability of a company and just want quick returns. The pressure from this class of investor to do the deal regardless of what happens to Qualcomm is what is driving Qualcomm to engage with Broadcom rather than just saying no.
Wrapping Up: Too Many Moving Parts
If you look at this mess, there are too many major moving parts and influencers. Right now, there is a fight for control of the board, but this attempt is likely to not only get a ton of regulatory scrutiny, but concerns about foreign takeovers of U.S. companies and China’s monopoly concerns. Hock Tan’s (Broadcom’s CEO) relationship with the anything but steady Trump administration adds even more uncertainty and potential drama to this effort.
In the end, there are just too many cooks in this kitchen from major governments, to investors, to litigating customers and competitors, and the money involved suggests this is more a train wreck in slow motion than anything else.
Rob Enderle is President and Principal Analyst of the Enderle Group, a forward-looking emerging technology advisory firm. With over 30 years’ experience in emerging technologies, he has provided regional and global companies with guidance in how to better target customer needs; create new business opportunities; anticipate technology changes; select vendors and products; and present their products in the best possible light. Rob covers the technology industry broadly. Before founding the Enderle Group, Rob was the Senior Research Fellow for Forrester Research and the Giga Information Group, and held senior positions at IBM and ROLM. Follow Rob on Twitter @enderle, on Facebook and on Google+