Qualcomm's takeover-thwarting strategy

Company wants NXP Semiconductors merger to help block Broadcom

  • Image by Coolcaesar/en.wikipedia

In the fall of 2016, the boards of Qualcomm and NXP Semiconductors agreed to merge the companies. It looked like a good deal all around: NXP is the biggest automotive chipmaker, providing diversification to Qualcomm, the biggest mobile-phone chipmaker that makes most of its money licensing its patents.

But much has happened in the past year: European Union regulators twice asked for more information on the NXP deal; China is also holding up the marriage; the mighty Apple sued Qualcomm for charging royalties for products it allegedly has nothing to do with. Recently, Broadcom Ltd. made a bid for Qualcomm; the offer of $70 a share was quickly rejected.

To fight off Broadcom, Qualcomm would like to have NXP in the fold. A fatter company is harder to take over. But now some big shareholders in NXP want a bigger bid than Qualcomm's $47 billion.

"Qualcomm can't close the deal without a buy-in from NXP holders," says the Washington Post. As of November 16, only 2.4 percent of NXP shareholders had tendered their shares. "Qualcomm needs 80 percent to get the deal done."

Bloomberg.com says Qualcomm is close to regulatory approval of the NXP deal but has to woo a group of NXP shareholders. "Investors who together hold at least 15 percent of NXP shares said they won't back the existing offer of $110 a share, and they're holding out for at least $125 apiece."

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The strategy is most interesting, and might actually work. But it sounds as if it will cost Qualcomm far more than it planned to expend in bringing NXP into the fold. Since this approach is already widely known, the NXP shareholders can afford to hold out for more; Qualcomm needs their shares more than they need to cash out quickly.

There are features here that are reminiscent of some of the "poison pill" provisions that corporations were adopting in the 80's and into the 90's when acquisitions were all the rage. The management portrayed then as protecting the stockholders when the actually did far more to protect top management.

As I and others have mentioned, Qualcomm would get more sympathy locally if it had been a better corporate citizen.

Visduh: Actually, I favored the poison pills that corporations used to fight off the takeover bandits in those days. First, the takeover bandits' strategy was fraudulent: they pumped up their stock with wild claims and then used bloated stock for takeovers.

Second, most of the takeover bandits were crooks. Many were allied with organized crime, as were the financiers behind them. Third, as history proved, they had no competence whatever to run a company after they took it over. That's why the conglomerates doing the takeovers collapsed in ignominy. Best, Don Bauder

Two other ways to view this "deal": 1. If Qualcomm raises their offer for NXP and NXP shareholders holdout for more money, which nixes the merger, NXP will have lots of its shareholders angry and looking for Corp. leadership blood! 2. From Qualcomm's perspective, this is a great delaying tactic which will only make Qualcomm's shareholders more supportive of Qualcomm's leadership,setting the stage for a number of options, one of which is raising additional capital via selling restricted stock!

Founder: I won't gainsay your theory, but I don't see why a delaying tactic would necessarily make Qualcomm shareholders more sympathetic to the company. Best, Don Bauder

There is another aspect to this potential Broadcom takeover. The record of success of hostile acquisitions isn't good at all. Friendly takeovers are one thing, and can succeed. Hostile grabs tend to be disappointing. One old example of that was when ATT forced NCR into its fold for reasons that had to do with then-current technology, and not future efforts. Shortly thereafter ATT was struggling and eventually spun NCR off to its shareholders in a weakened state. The whole thing was reported in the financial press as a disaster. While NCR is still around, it lacks the dominance it once had.

Broadcom will, as some Qualcomm fans fear, milk the operation for its cash flows and likely will curtail the research and development that has made Qualcomm what it is today. Another disaster in the making?

Visduh: I agree strongly that hostile takeovers are usually disastrous. I would also say that friendly mergers are quite often unsuccessful.

Mergers of companies in similar businesses can be successful. But when a company tries to take over another in a completely different field, disaster looms. The buyer has no idea how to run the company it took over. Wall Street will never learn this lesson because it doesn't give a hoot about business success post-takeover. It just wants the quick buck of an offer well above the price at the time. Best, Don Bauder

It's actually worse than that. The Wall Streeters who put the mergers together get fat fees. Then when the merger is undone, they get paid fees again. It's a type of churning done on a massive scale.

Visduh: You are absolutely right on all counts. Best, Don Bauder

Too bad the poison pills are only placebos.

Ponzi: You are right that many of them, unfortunately, did not work. Best, Don Bauder

NOW BROADCOM WANTS TO OUST QUALCOMM BOARD. On Monday, Broadcom stepped up its efforts to take over San Diego's Qualcomm by putting up a slate of directors to replace Qualcomm's entire board. This ploy could work, given all the problems Qualcomm has had, causing the weakness in its stock.

Following the Broadcom offer, the stock has bounced back, closing yesterday (December 5) at $64.69. It has been below $50 in the last 12 months. Its high in this 12-month period is $70. Still, that is significantly below what it traded at a couple of years ago. Best, Don Bauder

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