AAPL Apple Inc

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)

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