A simple acquisition attempt -- at least, as simple as one can be -- has turned into an angry dispute, with extraordinary measures taken to persuade shareholders on both sides, and potential national security concerns spanning from the US to China.
On 6 November 2017, Broadcom (AVGO) issued an unsolicited bid for Qualcomm (QCOM). The announcement, which came to some as a surprise, included what Singapore-based Broadcom believed was a fair deal.
In total, $70.00 per share made up of $60 in cash and $10 in Broadcom stock for Qualcomm shareholders was laid on the table in a deal worth roughly $130 billion.
This amount represented a 28 percent premium over the $54.84 closing price of Qualcomm common stock on 2 Nov 2017, a date before the rumors of a potential acquisition surfaced and temporarily impacted the share prices of both companies.
Broadcom's offer also included the shouldering of $25 billion in net debt and was made on the assumption that Qualcomm would either finish a pending buyout of NXP Semiconductors (NXPI) for the price of $110 a share in cash or withdraw completely.
Broadcom said that the acquisition of Qualcomm would be "highly complementary to Broadcom's portfolio," and the merged company would "accelerate innovation and deliver more advanced semiconductor solutions to its broad global customer base."
Bank of America Merrill Lynch, Citi, Deutsche Bank, J.P. Morgan, and Morgan Stanley offered debt financing for the deal, alongside Silver Lake Partners which committed $5 billion of convertible debt financing.
However, Qualcomm was less-than-impressed with the offer.
The San Diego, California-based company said Broadcom's offer "significantly undervalued" Qualcomm's business and future prospects.
Qualcomm's board rejected the suit on 13 November, roughly a week after the offer was made, citing future growth in areas including the Internet of Things (IoT), edge computing, and 5G networks.
"We think what it's [Broadcom] excited about is the baseband opportunity and the rest of the assets will be kept, divested, or shut down as appropriate.
Fundamentally, AVGO could resolve not only the host of customer disputes but also various regulatory issues that QCOM is engulfed in by implementing a fundamental change in the business model.
Also, there are sizable SG&A [Selling, General and Administrative Expenses] savings that could be realized from QCOM." - RBC analyst note, 15 Nov
After Broadcom attempted to lure Qualcomm investors directly, the outright "no" prompted more hostile action: Broadcom tried replace Qualcomm's board to force the deal through.
In total, 11 independent directors were suggested to replace Qualcomm's entire board.
"Although we are taking this step, it remains our strong preference to engage in a constructive dialogue with Qualcomm," said Broadcom CEO Hock Tan. "We have repeatedly attempted to engage with Qualcomm, and despite stockholder and customer support for the transaction, Qualcomm has ignored those opportunities."
Meeting with failure once more, Broadcom submitted a "best and final offer" -- which, as it happens, was not so best-and-final -- on 5 February.
The renewed offer pledged $82 per share, made up of $60 in cash and $22 in Broadcom stock, a 50 percent premium on the firm's share price on 2 November 2017.
At this stage, Qualcomm was also requested not to delay its annual shareholder meeting, due to take place before 6 March 2018.
This, too, was not acceptable to Qualcomm's board. Until this point, the US chipmaker had rejected Broadcom's requests to meet and discuss a potential acquisition, but perhaps surprisingly, finally offered to meet.
Key coverage: Broadcom offers to buy Qualcomm in $130 billion deal | Qualcomm rejects Broadcom acquisition offer | Broadcom moves to unseat Qualcomm board in hostile takeover effort | Broadcom submits final $146 billion offer in Qualcomm takeover bid | Qualcomm leaves the door open for potential Broadcom deal
Tan sent out a letter with an enthusiastic agreement, asking to talk to Qualcomm "without delay."
A meeting was then scheduled on 14 February, in which Broadcom executives met with Qualcomm then-Chairman Paul Jacobs and CEO Steve Mollenkopf.
Broadcom appreciated the meeting and backed down slightly on its board takeover efforts, asking for six nominees rather than 11. However, a potential deal was stonewalled yet again, not only due to price but because of regulatory worries which would haunt Broadcom later down the line.
Qualcomm said that "Broadcom continued to resist agreeing to other commitments that could be expected to be required by the FTC, the European Commission, MOFCOM and other government regulatory bodies."
The company also said that regulatory concerns would cause a state of limbo, which would likely have a detrimental impact on share value.
Broadcom's promise of an $8 billion breakup fee would "not come close to compensating for [these] risks," Qualcomm added.
While it may have been possible at this stage to clear the regulatory problems, Qualcomm then threw a curveball.
Broadcom's purchase request included Qualcomm's completion or withdrawal from the NXP deal. However, on 20 February, Qualcomm then chose to increase its offer for the semiconductor company to $127.50 per share from its original bid of $110 per share in a deal worth $44 billion.
In response, Broadcom said it was "evaluating its options" and "the price increase demonstrates the Qualcomm board's disregard for its fiduciary duty to maximize value for Qualcomm stockholders."
Only 24 hours later, Broadcom then changed the so-called "best and final offer" to $79 per Qualcomm share, made up of $57 in cash and $22 in Broadcom stock.
See also: Qualcomm, Broadcom meet: Is there a thaw in this hostile takeover dance? | Qualcomm to Broadcom: Thanks for the meeting, but regulatory risk is too high for a deal | Broadcom demanded control of licensing business in Qualcomm acquisition bid | Qualcomm raises bid to acquire NXP Semiconductors to $44 billion
Broadcom claimed that the sweetened NXP deal "transferred $4.10 per Qualcomm share (or $6.2 billion of value) from Qualcomm stockholders to NXP stockholders." However, should the deal fall through, Broadcom was willing to revert back to $82 per share.
In response, Qualcomm said the "reduced proposal has made an inadequate offer even worse" and "Broadcom is well aware there is no "reduction of value by $4.10 per share," because the transaction could not be completed at $110.00 per share."
Analysts noted that a bid of closer to $160 billion may be considered more favorably. It also came to light that Broadcom was seeking full control of Qualcomm's licensing business by making "all material decisions" relating to the lucrative sector.
At this stage, it appeared that Qualcomm was concerned that handing over full control of the licensing business would cause antitrust issues and regulatory problems.
Roughly a week later, Qualcomm offered up a rehashed deal which the company said would resolve everything "other than price." The revised agreement (.PDF) included an increase to the breakup fee, a pledge by Broadcom not to break apart just Qualcomm businesses to clear regulatory issues, and more.
Broadcom called the agreement "engagement theater" and said Qualcomm was not "genuine" in engagement.
Key coverage: Broadcom demanded control of licensing business in Qualcomm acquisition bid | Qualcomm offers olive branch in Broadcom talks
The saga continued.
On the first weekend of March, several days before Qualcomm's annual meeting was due to take place, the company submitted a voluntary request to the Committee on Foreign Investment in the US (CFIUS) to investigate the acquisition's potential national security issues.
CFIUS is a regulatory body which has been set up to monitor and control foreign acquisitions of American companies but very rarely becomes involved before a deal is formally signed.
Broadcom said it was not made aware of the request, and on 5 March, said this amounted to an "intentional lack of disclosure."
"This was a blatant, desperate act by Qualcomm to entrench its incumbent board of directors and prevent its own stockholders from voting for Broadcom's independent director nominees," Broadcom claimed. "It should be clear to everyone that this is part of an unprecedented effort by Qualcomm to disenfranchise its own stockholders."
In other words, the company believed that the request was made purely to delay the meeting, preventing any changes to the board -- and therefore any future negotiations with potentially fresh members to secure a deal.
See also: Qualcomm slams Broadcom criticism of CFIUS investigation as 'dismissive rhetoric'
Qualcomm called this public statement nothing more than a "now familiar pattern of deliberately seeking to mislead shareholders and the general public by using rhetoric rather than substance to trivialize and ignore serious regulatory and national security issues."
It appeared that CFIUS agreed, most likely to Broadcom's dismay. The US agency requested a delay to Qualcomm's meeting until 5 April, and a federal panel then said the buyout "could pose a risk to the national security of the United States."
CFIUS said that a "full investigation" was warranted.
"While QCOM has convinced CFIUS that an AVGO acquisition might raise national security concerns, we see the worries as overblown as AVGO immediately pledged to create a new $1.5B fund to invest in RF technology while maintaining the R&D resources QCOM devotes to 5G.
In addition, AVGO promises not to sell any critical national security assets to any foreign companies. However, the CFIUS order to postpone QCOM shareholder meeting from March 6 to April 5 allows more time for QCOM to receive MOFCOM approval for NXPI." - KeyBac Capital markets analyst note
The concerns stem from China. Broadcom is based in Singapore, however, Qualcomm also appears to have deals and partnerships in the country.
In response to the US agency's concerns relating to China's influence in the technology sector, Broadcom sent a filing to the US Securities and Exchange Commission (SEC) which demonstrated Qualcomm's businesses in the country. (Shown below in part)
Broadcom also added that the company's plans to redomicile to the US -- and formally become a US company -- were expected to be finalized by 3 April 2018, and emphasized that the potential acquisition was always made on this basis. Broadcom commented:
"In both the definitive merger agreement that Broadcom provided to Qualcomm and in the revised version that Qualcomm sent back to Broadcom on 26 February 2018, one of the closing conditions was that Broadcom redomicile to the US, and notably, in neither party's draft was the closing of the proposed acquisition conditioned on CFIUS clearance.
In short, US national security concerns are not a risk to closing, as Broadcom never plans to acquire Qualcomm before it completes redomiciliation."
Regulators believe that a deal could hamper Qualcomm's research and development, give China dominance in key wireless technologies, as well as threaten security. In a letter (.PDF), CFIUS said:
"Reduction in Qualcomm's long-term technological competitiveness and influence in standard setting would significantly impact US national security. This is in large part because a weakening of Qualcomm's position would leave an opening for China to expand its influence on the 5G standard-setting process.
Chinese companies, including Huawei, have increased their engagement in 5G standardization working groups as part of their efforts to build out a 5G technology. [...]
While the United States remains dominant in the standards-setting space currently, China would likely compete robustly to fill any void left by Qualcomm as a result of this hostile takeover."
5G appears to be a key issue, and to sweeten up regulators, Broadcom pledged to make the US a "leader" in the mobile technology with a new $1.5 billion fund for US engineers and 5G training.
While Broadcom fought back claims that a Qualcomm-Broadcom deal would be a national security risk and pushed ahead with shifting countries, Qualcomm was making some changes of its own.
On 9 March, Paul Jacobs, Executive Chairman of the Qualcomm Board of Directors, left his position and the role was discontinued.
While Jacobs will still serve on the board, the role has been changed to an independent chairman, awarded to Jeffrey Henderson. The company has also extended the offering period to finalize the NXP buyout.
"With much at stake, we expect [Qualcomm] management to aggressively focus on driving shareholder value through several different ways. The first and perhaps most significant driver is closure of the NXPI acquisition. We expect QCOM to gain regulatory clearance in short order." - Instinet analyst Romit Shah
By 12 March, Broadcom's desired purchase seemed further and further away. Unfortunately for the tech giant, the US Treasury Department and CFIUS agreed that an acquisition would cause national security issues and went so far as to say the agency may take the matter to the top, potentially referring the matter to US President Donald Trump.
Trump has applauded Broadcom's plans to return to the country, calling Broadcom "one of the really great, great companies."
In the same breath, CFIUS berated Broadcom, which is headquartered in Singapore and co-headquartered in San Jose, California, for allegedly violating an order to tell the agency about a move back to US shores and to give at least five days' notice.
Broadcom has denied this, saying that the company has been "fully transparent" with CFIUS.
Another element thrown into the mix are reports which suggest Intel may be considering a bid for Broadcom. If Broadcom succeeds, the combined company would be a competitive threat to Big Blue, and so a buyout would be an effective counter-move -- albeit a costly one.
"Intel's best hope might lie in a stalemate, no Broadcom-Qualcomm transaction, no suicidal Broadcom acquisition," says analyst Jean-Louis Gassée.
Qualcomm continued to resist, regulators and national security became involved, other competitive forces were watching closely, and before there was even a formal agreement, the saga abruptly came to a halt.
The acquisition attempt transformed not only into a game of chess between two enterprise players but rather became a struggle for dominance in next-generation technology fields and highlighted tensions between the US and China.
As a result, Trump blocked the deal on Monday, citing "credible evidence" it could pose a national security threat.
The White House ordered that Broadcom and Qualcomm "immediately and permanently abandon the proposed takeover" and verify with CFIUS "that all steps necessary to fully and permanently abandon the proposed takeover of Qualcomm have been completed."
See also: Donald Trump blocks Broadcom's bid for Qualcomm
"All 15 individuals listed as potential candidates on the Form of Blue Proxy Card filed by Broadcom and Broadcom Corporation with the Securities and Exchange Commission on 20 February 2018 (together, the Candidates), are hereby disqualified from standing for election as directors of Qualcomm," the order added. "Qualcomm is prohibited from accepting the nomination of or votes for any of the Candidates."
In a statement, Qualcomm said little relating to the conclusion of the story.
"Qualcomm was also ordered to reconvene its 2018 Annual Meeting of Stockholders on the earliest possible date, which based on the required 10-day notice period, is 23 March 2018," the company said. "Stockholders of record on 8 January 2018, will be entitled to vote at the meeting."
As the losing party, Broadcom released perhaps the shortest statement in the firm's history:
"Broadcom is reviewing the Order. Broadcom strongly disagrees that its proposed acquisition of Qualcomm raises any national security concerns."
It seems the saga is over. The deal is now permanently off the table -- at least in President Trump's term -- but this does not mean that the two companies will not clash, or come together, at some point in the future.
Update 14.3.2018: 12.53GMT: Broadcom has formally withdrawn its offer to acquire Qualcomm.
In a statement, Broadcom said the company has "withdrawn and terminated its offer to acquire Qualcomm," alongside all of its nominees for Qualcomm's board.
"Although we are disappointed with this outcome, Broadcom will comply with the Order," the company said. "Broadcom will continue to move forward with its redomiciliation process and will hold its Special Meeting of Stockholders as planned on 23 March 2018."
"[Broadcom] sincerely appreciate[s] the significant support we received from the Qualcomm and Broadcom stockholders throughout this process," the company added.