As some of you likely recall, I used to run an acquisition clean-up team for a time at IBM. Since then, I’ve consulted on acquisitions and been part of several them, both good and bad. Elements of a good acquisition include a great disparity in size between the larger acquiring company and the smaller company being acquired, stability with the acquiring company, support on both sides for the acquisition, and a strong acquisition process that has been proven over time. Dell/EMC is the only large-scale acquisition I’ve been part of and it was successful. They didn’t meet all four of these criteria, as EMC was massive but, offsetting this, Dell was private and they were 10 of 10 in the other categories. Now, you might argue that the HP/Compaq merger, which I also played a role in, was also successful, but given that it set up a sequence of events that cost the HP CEO, Carly Fiorina, her job, and it only worked because of a lengthy proxy fight and the skills of Compaq’s CEO, I don’t consider it a true success, not the least of which the firm was recently broken up again.
Let’s talk about why Qualcomm and Broadcom as a merger (assuming it gets through regulatory approval which, in and of itself is doubtful) is a tragedy in four acts.
Act One: Qualcomm’s Size
As noted above, large mergers almost always fail. This is simply because there are too many moving parts and just keeping companies this size running properly tends to consume every element of time and skill of the managing team. Layer on another firm of near equal or larger size, particularly if you are doing an integration merger (which is the plan), and you have all the elements of a train wreck.
Now, as I noted, there can be offsetting elements, like Dell being private, but they don’t exist in this case and there is nothing visible from the other supporting elements. Add to this what will likely be a near crippling debt load when the firm is done and act one, by itself, is a tragedy in the making.
Act Two: Stability
Broadcom itself is part of a very rapid fire group of acquisitions that haven’t settled yet. One of the scary things about a rapid acquisition cadence is that the financials from the firm can’t be trusted. This is because rapid fire acquisitions force accounting to do massive changes to the books and it takes time to catch all the mistakes, overstatements, duplicate entries and problems. Years ago, I observed one of these things and the result was criminal charges filed against the operating team for misstating the financials. This happens because mergers create a massive drag on performance and line managers tend to cover up the related problems for fear they will lose their jobs, or senior executives actively falsify their reports for the same reason, betting that eventually they will dig themselves out of a cascading collapse of revenue and profit.
Because the books haven’t settled, internal audit is often kept on the sidelines and the lack of stability in the books makes it nearly impossible for them to do their jobs. But the even more troubling problem is that in an integration merger, you need a stable foundation to integrate against. Broadcom isn’t stable and without a stable foundation, you typically can’t build a stable company. The likelihood of misstated financials aside, the lack of a foundation creates a strong opportunity for tragedy in act two.
Act Three: No Qualcomm Support
The reason you need support on both sides is that people must execute the merger and then come together to help run the new merged company. Large integration mergers, where there is a lot of product overlap, puts a significant number of jobs on both sides at risk so even though it appears that only Qualcomm doesn’t really like this idea, it is very likely there are many managers and executives in the newly merged Broadcom that aren’t fans of the idea either, particularly because of a high degree of product overlap. In addition, Broadcom’s leadership has indicated they would dramatically cut Qualcomm’s research budget, which is a major part of the firm’s culture and identity making it nearly impossible to get employee and executives at Qualcomm to support this effort. This lack of support founds a very tragic act three.
Act Four: Acquisition Process?
One of the critical parts of the Dell/EMC merger was an acquisition process that was created after decades of work at IBM and then adopted and refined by Dell. At the heart of this process was a general practice to identify and protect the key elements of the acquired firm so they weren’t destroyed by the process. Because Broadcom’s own mergers don’t appear to have settled, it makes it almost impossible to assess the process but the comments about eliminating the part of Qualcomm that creates that firm’s long-term success and value, its research, suggests the process doesn’t protect the asset acquired. That, along with the other parts, virtually assures that act four will result in the dead hulks of one or both firms. So, act four goes beyond just tragedy and plants the final major nail in the coffin of this puppy and, along with the other elements, suggests this merger would be an absolute tragedy.
Wrapping Up: Good Mergers and Bad
Elements of a good merger range from assuring the scope of the acquiring company is broad enough to cover the acquisition to assuring there is a process that won’t destroy the acquired company. Those elements don’t exist here. There is an overarching concern that this is being attempted to distract or cover up the problems that likely exist, but haven’t been reported, resulting from Broadcom’s earlier mergers. Given the combined potential power of the merged firms, even getting regulatory approval is far from a given, but every major element I look for in a successful merger is broken or non-existent. Thus, this attempted merger is likely to result in the death of both firms and that would assure this is a tragedy in four acts.
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+