No Worries on M&A Front after Trump Veto

Article By : Rick Merritt

Rejected deal alone would've been larger than entire record year in semiconductor mergers & acquisitions

SAN JOSE, Calif. — The Trump Administration set a new precedent by prohibiting Broadcom’s hostile takeover of Qualcomm before shareholders got a vote. Analysts were mixed over whether such executive power is a good thing, but they agreed the semiconductor industry — and Broadcom — will continue to pursue big deals.

Trump blocked an acquisition of Lattice in September, “but this was a much smaller deal and the private-equity company behind the deal had China backing,” noted Kevin Krewell of Tirias Research.

The latest move pre-empted both a proxy vote and a planned investigation from the U.S. Committee on Foreign Investment in the U.S., although a letter from CFIUS signaled its strong concerns about a loss of 5G cellular technology with the deal.

“Is it right for a government to block something before the fact? It takes shareholder rights away for domestic security or other reasons…No one here remembers anything quite like this,” said Rob Lineback, a senior analyst with market watcher IC Insights.

Embattled CEOs will learn from Qualcomm’s example they may have more success making a case with regulators than shareholders if they have a technology edge. “The question is what happens in the future — will we see more pre-emptive blocking?” asked Lineback.

Linley Gwennap, another veteran analyst, agreed.

“Where does this stop? They created a new executive power and who knows what other technology or business arrangement they could deem essential to national security… Are they concerned Intel has a deal to share its 5G technology with Spreadtrum, mainly owned by the China government?” he asked.

Lineback noted the Japanese government took a role in a deal last year that kept ownership of Toshiba’s semiconductor unit inside the country. China and other countries are well known for active government support of their tech industries, an area where the U.S. has been much less aggressive previously.

Some analysts saw more engaged government actions as a good thing.

Broadcom and Qualcomm

“The new mode in Washington D.C. is tech is important for the U.S. The government is realizing we are not making the appropriate investments. We have nothing in displays. Tesla is making some good batteries, but we don’t have adequate mass manufacturing of them,” said Handel Jones of International Business Strategies.

“China is doing advanced work in quantum communications with a satellite link between Beijing and Shanghai. We are not making big investments in areas to let us remain a leader. We have no base station company, and 5G will be huge,” he added.

Too much consolidation can a bad thing. “You don’t want to be held hostage to a dominant solution by one manufacturer,” said Stuart Carlaw, chief research officer at ABI Research.

If Broadcom bought Qualcomm the combined company could have held a 59 percent share in Wi-Fi, 46 percent in Bluetooth, 67 percent in location chips and 41 percent in RF, he estimated. Such dominance is “unheard of…[and] an unhealthy practice,” he said.

Broadcom, others still on the M&A path

Trump’s move is not expected to cool the consolidation fever of the semiconductor industry and Broadcom in particular. Initial speculation is Broadcom may eye Xilinx or Mellanox to expand its wired networking business as early as April, when it gets its headquarters moved to the U.S.

“Broadcom’s business model is built around acquisitions. It’s CEO, Hock Tan, has grown the company by buying other people’s innovations. Mellanox and Xilinx are the kinds of companies he likes to acquire,” said Gwennap.

Jones agreed about Hock Tan’s model, which has “made investors a lot of money,” but suggested other targets.

“Xilinx and Mellanox won’t move the needle much for him. He wants to cut costs and deliver significant revenue growth. You have to think about companies with annual revenues of $5 billion-plus like AMD, Intel, Renesas, NXP, Infineon and STM,” he said.

As for the industry overall, “the environment is still conducive to acquisitions,” said Gwennap. “Having economies of scale is good for any semiconductor company as making chips becomes more expensive. As long as interest rates are low and stock prices are high, we’ll see more big deals,” he added.

Donald Trump and Hock Tan

In November Hock Tan (left) announced with President Trump at the White House his plans to move Broadcom to the U.S. (Source: C-Span)

Texas Instruments, itself the product of several analog acquisitions, is one target, said Jones. Intel has many options and Web giants such as Google could benefit from acquiring more chip companies, he said.

Ironically, “this setback for Broadcom makes it a target for acquisition, and there were rumors on Friday that Intel was interested,” said Krewell.

The new old outlook for Qualcomm

Despite the chaos, blood pressure levels may decline a bit at Qualcomm. The mobile chip giant can return to its original plan of managing its embattled patent licensing business as best it can while acquiring NXP to diversify into automotive and the Internet of Things.

China is expected to approve the deal, but it could still throw a wrench in the works.

“China can ask for whatever it wants because being the last hurdle for the deal gives them more power. What will the U.S. do if Qualcomm looks like its handing too much technology to China,” asked Lineback.

The CFIUS letter and Trump’s order both cited concerns with China’s growing tech prowess. “China has taken Trump’s remarks in a negative way that could hurt Qualcomm’s position in China,” said Jones, although he expects the NXP deal will get approved.

One interesting wrinkle will be how Qualcomm, the world’s largest fabless company, deals with NXP’s several small fabs.

“I don’t believe they would keep all the fabs. I’d expect to see some sold or shut down, but they don’t want to change the business plan of a successful operation…Older sensors and other things are doing quite well and have a longer life than we thought” said Lineback.

Trump’s move is “also a setback for Apple, which wanted to disrupt Qualcomm and have a friendlier Broadcom management control patent licensing terms,” said Krewell

Qualcomm is not expected to radically change its patent licensing model. Even though it sparked the disputes with international regulators and Apple that motivated Broadcom’s bid, it will remain a core part of Qualcomm’s business model, analysts said.

Market data IC Insights mergers and acquisitions

Broadcom’s single $117 billion bid for Qualcomm would have topped even recent historic peaks of annual total deals. (Source: IC Insights)

“I think they will make as little change in patent licensing as possible. Although they are getting a tremendous amount of grief, it’s still a crown jewel for them. I think they built patent litigation into their business model. They attract a lot of bad feelings, publicity and regulatory reviews, but they see that as part of the turf,” said Lineback.

“My opinion is Qualcomm’s model is not that onerous. When you make long term investments in technology, you need multiple revenue streams,” said Jones.

“Their business model is good, but needs to be fine-tuned a bit. They have time now to renegotiate deals with a handful of big companies like Apple, Huawei, Samsung — deals with 10 large companies give you 70-80 percent of the mobile market,” said Jones.

— Junko Yoshida contributed to this report.

— Rick Merritt, Silicon Valley Bureau Chief, EE Times

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