'Engagement Theater'? Qualcomm Wants More Talks with Broadcom
Qualcomm said Monday it is ready for further talks with rival Broadcom to see if the two sides can reach a negotiated sale of the San Diego cellular technology giant, with price remaining a key sticking point.
In a letter sent to Broadcom on Monday, Qualcomm Chairman Paul Jacobs revealed that representatives of the two companies met for a second time on Feb. 23, where they made progress on some of the protections Qualcomm is seeking during what's expected to be a long regulatory review of the deal by global competition agencies.
But Qualcomm also wants additional steps -- including a higher break-up fee should antitrust regulators block the deal and more details about Broadcom's plans to revamp Qualcomm's lucrative patent licensing business.
In addition, Qualcomm contends Broadcom's $79 per share offer remains well below the fair value of the company given its pending acquisition of NXP Semiconductors to diversify beyond smartphones, an eventual settlement of legal disputes with Apple surrounding patent fees and growth from new 5G mobile networks.
"While we have made progress on regulatory and other deal-certainty issues, you have continued to insist that your current $79 per share proposal is your best and final proposal," Jacobs said in the letter to Broadcom Chief Executive Hock Tan.
Qualcomm's board "continues to be of the unanimous belief that each of your proposals, including your prior $82 per share proposal, materially undervalues Qualcomm."
Broadcom called Qualcomm's call for more talks "engagement theater."
"Broadcom does not believe that the process outlined by Qualcomm today is designed to lead to a prompt agreement," the company said in a statement.
Qualcomm's willingness to talk comes as the San Diego company's shareholders are expected to vote March 6 on whether to support Broadcom's hostile takeover bid.
Broadcom has nominated six alternative candidates to Qualcomm's board of directors, which would give Broadcom a majority to push through its $117 billion takeover -- the largest ever in the technology industry.
Broadcom's effort got a boost last week when two influential shareholder advisers recommended that Qualcomm stockholders support at least some of Broadcom's board nominees.
The recommendations likely helped influence Qualcomm's board to propose further talks.
"We do not know for certain what is bringing this shift in attitude, though we suspect recent points of view offered by the proxy services Institutional Shareholder Services and Glass Lewis, as well as the company's recent meetings with shareholders, may be part of it," wrote Bernstein Research Analyst Stacy Rasgon.
Broadcom objected to the negotiation process laid out by Qualcomm, saying it was unnecessary.
Broadcom claims that Qualcomm has refused to confirm that it will hold its annual meeting on March 6.
"Qualcomm's owners deserve the chance to preserve Broadcom's $79 per Qualcomm share offer," the company said in a statement. "Broadcom, as a stockholder of Qualcomm, will fight to ensure the ability of Qualcomm's owners to determine Qualcomm's future."
Qualcomm countered that it has no plans to delay its annual meeting and accused Broadcom of trying to create a false impression of its willingness to negotiate.
In talks on Feb. 23, Broadcom dropped its demand to control major decisions surrounding Qualcomm's patent licensing arm while the deal was pending, which Jacobs called progress in his letter to Tan.
Qualcomm wants Broadcom to increase its break-up fee should antitrust regulators block the deal to 9 percent of the value and debt of Qualcomm, including its pending acquisition of Dutch automotive chipmaker NXP.
Rasgon estimated that amount to be roughly $13.5 billion -- up from the $8 billion in Broadcom's current offer. The high break-up fee is based on the Baker Hughes/Halliburton merger, which also involved complex regulatory issues and eventually failed.
In addition, Qualcomm wants more information about Broadcom's plans for changing patent licensing -- which makes up a majority of Qualcomm's profits and funds much of its research and development to create new technologies.
Broadcom has declined to spell out its plans, claiming it would violate antitrust laws. But Jacobs said knowing how Broadcom would change its patent licensing arm is vital to understanding the "antitrust risks and value implications" of the deal.
Qualcomm proposed using an antitrust law firm as an intermediary to share permissible information on licensing, then meet again to hammer out the remaining regulatory hurdles.
Qualcomm also suggested entering into a non-disclosure agreement to share information on price.
"We appreciate that we have differences in our views on value, and ours is based on significantly more information than the public data you now have at your disposal," the letter said.
Qualcomm is confident that it can deliver $7 per share in adjusted earnings by 2019, which implies a stock price of around $100 per share.
Qualcomm's shares gained 5.75 percent Monday to close at $66.98 on the Nasdaq. Broadcom's shares were flat in Monday trading at $252.95.
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Image credit: Qualcomm; Broadcom; Artist's concept.