By Ted Greenwald
Qualcomm Inc., reeling from a series of regulatory and
competitive setbacks that cut its market value by nearly 20% over
the past year, now faces a $100 billion takeover offer from rival
chip maker Broadcom Ltd.
California-based Broadcom offered $70 a share for Qualcomm,
representing a 28% premium from its closing price on Thursday --
before The Wall Street Journal reported that an approach might
happen.
The cash-and-stock deal carries a value of roughly $103 billion
and includes about $25 billion of debt. In a news release, Broadcom
said it valued the deal at $130 billion.
Qualcomm shares rose 3.5% to $64 in premarket trading while
Broadcom shares were 1.5% higher at $277.77.
A year ago, Qualcomm was riding high after unveiling the chip
industry's largest-ever acquisition: a $39 billion proposed deal
for NXP Semiconductors NV.
But a string of hits by regulators competitors and customers
including Apple Inc. has left the industry titan in a vulnerable
position. Qualcomm's profit in the fiscal year that ended Sept. 24
plummeted 57%, and its share price declined 18% in the 12 months
through Thursday's close compared with a 58% rise in the PHLX
Semiconductor Sector Index. That was before news of Broadcom's
interest sent Qualcomm shares up nearly 13% on Friday.
The possible Broadcom takeover is likely to face intense
regulatory scrutiny since the companies are both leaders in Wi-Fi
and Bluetooth technology. Qualcomm already has been under pressure
from antitrust agencies in several jurisdictions world-wide,
including the U.S. The company has paid hefty regulatory fines in
China, South Korea and Taiwan.
Broadcom and Qualcomm have largely complementary product lines.
Qualcomm is the market leader in chips that manage wireless
communications in smartphones and owns patents on technology
essential to implementing cellular-communications standards, which
allows it to collect a royalty on nearly every smartphone sold
world-wide.
For its part, Broadcom, which was bought by Avago Technologies
Ltd. in 2015 for $39 billion, sells a diverse line of equipment for
networking and communications -- including technology for
smartphones from Apple Inc. and Samsung Electronics Co. -- as well
as data storage, electronic displays and set-top boxes.
Increased competition and falling prices have triggered a wave
of consolidation in the semiconductor industry.
Broadcom said Monday that the proposal stands regardless of the
of the outcome of Qualcomm's proposed acquisition of NXP
Semiconductors.
The blows have come thick and fast for Qualcomm. South Korea's
competition regulator in December fined the company $853 million
for anticompetitive behavior, and its Taiwanese counterpart last
month followed with a $773 million fine. The U.S. Federal Trade
Commission in January sued the chip maker in a case that is
pending.
Days after the FTC suit, Apple, one of Qualcomm's biggest
customers, sued Qualcomm claiming unfair patent-licensing
practices. Apple has stopped paying royalties that analyst Stacy
Rasgon with Bernstein Research estimates to be $2.5 billion
annually, and the Journal reported recently that Apple could
jettison Qualcomm chips from iPhones and iPads next year,
threatening an estimated $2 billion or so more in annual chip sales
for Qualcomm.
Another licensee, which Qualcomm hasn't identified, stopped
paying $1 billion in royalties annually. Qualcomm lost a string of
legal bids to shake off lawsuits and restore payments.
Mr. Rasgon likens Qualcomm's challenges to the game Whac-A-Mole.
"Every time you feel it's fixed, something else pops up," he said.
"The deterioration that it has brought is what potentially opens up
the opportunity for Broadcom."
Qualcomm Chief Executive Steve Mollenkopf, in a call with
investors last week, pointed to recent moves to expand Qualcomm's
market, including the NXP Semiconductors deal and a partnership
with Microsoft Corp. to produce Qualcomm-driven laptops.
A Qualcomm spokesman on Sunday declined to comment further.
The NXP deal, announced in October 2016, is supposed to bolster
Qualcomm by giving it the top developer of chips for automobiles,
but it faces continued regulatory scrutiny and pressure from
activist investors for a higher price. The deal was to close this
year, but Mr. Mollenkopf last week acknowledged that it could slip
to 2018.
Qualcomm and its supporters argue that it has overcome similar
troubles before and will again. Between 2005 and 2009,
telecommunications-industry leaders challenged Qualcomm in court
and before regulators on similar grounds as its opponents today.
The European Commission launched an investigation, South Korea's
government issued a fine and Japan said Qualcomm had broken
competition laws. Qualcomm settled with its adversaries and
placated some regulators.
"If you were around in 2007, you'd think Qualcomm's business was
even more at risk," said Mike Walkley, an analyst with the
financial-services firm Canaccord Genuity who has covered Qualcomm
for 18 years. "If you bought the stock then, you got a very good
return when its disputes were settled."
Other observers say that in recent years the legal landscape has
shifted against Qualcomm. Most of Qualcomm's problems center on
resistance to its patents business, which was long one of the most
profitable businesses in the chip industry. Patent-licensing
revenue in fiscal 2017 made up 29% of the chip maker's total
revenue but 80% of the company's pretax profit.
"It's very hard to see how Qualcomm can settle this and make it
go away, " said Rufus Pichler, an intellectual-property lawyer with
Morrison & Foerster.
Courts have moved against key elements of Qualcomm's business
model, according to patent lawyers, by shrinking both the size of
the royalty pie and the slices companies can take from it.
Observers point to two cases with particular relevance.
Qualcomm bases its royalty on a percentage, nominally 5%, of the
price of a handset. A U.S. District Court in 2013 forced Innovatio
IP Ventures to calculate the royalty on its Wi-Fi chip based not on
the price of a Wi-Fi router but on that of the chip. The decision
cut Innovatio's fee per device to less than a dime from between $3
and $36. That principle since has been affirmed by a federal
appeals court.
With smartphones, Qualcomm's cut likely is five to 10 times
bigger than that of some other patent holders whose technology goes
into the devices, according to Nicholas Rodelli, a former
Securities and Exchange Commission attorney who heads the
business-law publication CFRA Legal Edge.
A federal-district court in 2013 found that total royalties paid
by Microsoft for patents in the Xbox game console must be divided
fairly among all holders of patents essential to technical
standards used in the device. Motorola Inc. demanded 2.25% of each
Xbox, roughly $3 to $4.50. The court ruled a fair rate was less
than 4 cents. That decision, too, has been affirmed on appeal.
Qualcomm has argued that such decisions aren't relevant to
cellular technology. "There really isn't any clear understanding or
any case law which would say that our prices, in the context of our
industry" exceed what would be considered fair, Qualcomm General
Counsel Don Rosenberg said in an interview last May.
--Imani Moise contributed to this article.
Write to Ted Greenwald at Ted.Greenwald@wsj.com
(END) Dow Jones Newswires
November 06, 2017 10:55 ET (15:55 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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