(Original title: Double-linked Mergers and Acquisitions Face Antitrust Scrutiny
By Li Na and Salsa Guo Liqin
One strong rejection, another threat to not back down. The acquisition attempts by Broadcom and Qualcomm for new semiconductor companies may have just begun.
On Monday, in U.S. time, Qualcomm rejected Broadcom's $130 billion offer, citing "substantially undervalued." In response to a reporter from CBN, Qualcomm emphasized that the strategy led by CEO Steve Mollenkopf and his team could create significantly greater value for shareholders than the proposed acquisition.
Hock Tan, CEO of Broadcom, immediately stated that they would not give up on the deal. "We still believe the tender offer is the most attractive to Qualcomm shareholders, and we have received encouragement from their responses. Many of them have already expressed their hope that Qualcomm will discuss the offer with us," he said.
Industry insiders who understand such merger operations told the First Financial reporter that it’s still unclear whether Qualcomm’s response is a gesture during a crisis or reflects the true sentiment of its shareholders. “After all, capital is as unpredictable as people’s hearts.â€
However, Qualcomm also mentioned in its response, “taking into account the uncertainty of follow-up supervision.†Obviously, this $100 billion-plus merger will inevitably attract attention from antitrust authorities.
Broadcom's Pursuit of Qualcomm
A week ago, Broadcom, a U.S.-based communications semiconductor company, suddenly submitted a tender offer to Qualcomm, causing significant concern within and outside the industry.
From the perspective of size and technical strength, the two companies are comparable. According to Gartner's 2016 semiconductor revenue rankings, Broadcom ranked fifth, while Qualcomm ranked third. Both are leading mobile internet processor companies and patent powerhouses in the communication field, as well as key players in the Internet of Things chip market.
Wang Xuan, a former Broadcom employee, told the First Financial reporter that Chen Fuyang was no ordinary player. He had previously claimed to be unfamiliar with the semiconductor industry but knew how to make bold statements. “Chen Fuyang increased the price directly by 25% after acquiring Broadcom. If customers didn’t agree, he would sell out directly. Major clients like Huawei were even required to place orders for future demand to guarantee old prices,†Wang said.
Broadcom’s response also revealed a high level of confidence. The company stated that Moelis & Company LLC, Citibank, Deutsche Bank, JP Morgan Chase, Merrill Lynch, and Morgan Stanley served as financial advisors, while Wachtell, Lipton, Rosen & Katz and Latham & Watkins LLP acted as legal counsel—both top-tier law firms.
Of course, besides financial support, Broadcom’s confidence comes from Qualcomm’s own challenges.
Wang Xuan explained that Qualcomm’s board, representing management interests, refused the offer to meet expectations. However, Qualcomm’s shareholder structure is highly fragmented, with many institutional investors holding large stakes. He believes that in the case of ongoing lawsuits and declining performance, Broadcom is taking advantage of fund managers’ current favorable positions.
Qualcomm’s fourth-quarter and full-year fiscal 2017 results showed that its fourth-quarter revenue was $5.9 billion, a 5% year-over-year decline, and net profit dropped to $168 million from $1.599 billion in the same period the previous year—a decrease of 89%. For the full fiscal year, revenue fell to $22.291 billion, a 5% drop, and net profit fell to $2.465 billion, a 57% decrease.
Additionally, Qualcomm’s business model is under pressure. “Before, Qualcomm could subsidize high R&D costs through royalties, keeping its technology at the forefront. But now, this model is being challenged by major companies and local governments. Qualcomm charges based on the overall phone price, and even high-end chips only account for a small portion of the total cost,†said Chen Zihao, an IP analyst at a global IP information service provider. He added that Qualcomm’s lawsuit with Apple has also impacted several quarterly results.
After reviewing the data, the First Financial reporter found that 2014 was a turning point for Qualcomm. In fiscal 2014, operating income reached $26.5 billion, and net profit was $7.97 billion. Since then, Qualcomm’s revenue has declined, falling to $22.391 billion in fiscal 2017. Net profit dropped from $5.3 billion in 2015 to $5.7 billion in 2016, and then to $2.465 billion in 2017.
“The fundamental reason for the acceleration in M&A activity in the semiconductor industry is that gross profits are dropping, and high-tech stars are soon becoming ordinary suppliers,†Wang Xuan told reporters. Even with the pursuit of scale, even star companies like Qualcomm might face acquisition. “Qualcomm’s product line is too narrow, and its business is too concentrated. This is the opportunity Broadcom saw,†he said.
“For Qualcomm, the acquisition may not be a bad thing. Its technology development and business model are now blocked everywhere. If it can merge with Broadcom, it will take a big step in the capital market,†said Chen Zihao. He believed that Broadcom acquiring Qualcomm is inevitable, and Broadcom’s experience in the capital market could push the offer to $80 or $90 per share, pushing the final transaction price beyond $150 billion.
Semiconductor Industry Enters a Period of Giant Integration
After 2000, the semiconductor industry's growth slowed. Hock recently shared his vision for the future of the semiconductor industry. Over the next decade, semiconductors are likely to shift from horizontal integration to vertical integration.
Indeed, with declining performance, the semiconductor industry has seen rapid M&A activity over the past few years. According to a recent report by the International Semiconductor Industry Association (SEMI), in 2015, semiconductor M&A transactions exceeded $60 billion, and in 2016 and 2017, they reached $116 billion and $93 billion respectively. The association noted that 2016 was the peak of the M&A frenzy, with most deals aimed at increasing scale and competitiveness in mature markets.
In 2016, more than 60 M&A deals were announced, with 49 completed by the end of the year. Three of these accounted for over 75% of annual M&A activity, including Avago’s $37 billion acquisition of Broadcom (now known as Broadcom after acquiring Avago), SoftBank’s $32 billion purchase of ARM Holdings, and Western Digital’s $19 billion acquisition of SanDisk.
SEMI reported that in 2017, 12 global semiconductor transactions were expected to close, valued at over $93 billion. The largest deal was expected to be the $47 billion acquisition of NXP Semiconductors by Qualcomm, which would be the biggest in Qualcomm’s history. The second-largest deal was a $14.8 billion transaction between Analog Devices and Linear Technology Group. These two deals alone accounted for 66% of the total global M&A volume in 2017.
The association stated that over the years, M&A activity in the semiconductor supply chain between equipment and material suppliers has continued. As equipment manufacturers, foundries, and fabless companies integrate further, price pressures and tougher negotiations may force suppliers to seek sustainable growth opportunities in emerging markets.
However, if the Broadcom and Qualcomm deal is finalized, the M&A volume in 2017 will far exceed the association’s forecast.
“The capital market is greedy and ruthless, but the market’s power is the most efficient institutional arrangement. If you don’t perform well, you may be acquired. There is always a whip behind the management,†said Wang Xuan.
The integration of giants still faces another risk factor: antitrust regulation.
In its response, Qualcomm mentioned “the uncertainty of subsequent regulatory oversight.†Obviously, this refers to the antitrust review risks associated with the $100 billion-plus merger. Not to mention that in the past three years, Qualcomm itself has been investigated by competition authorities in major jurisdictions, including China, the U.S., and Europe, due to its business practices or models. It has also faced massive fines in important markets like China and South Korea.
Regardless of the standards applied, mergers and acquisitions worth over $100 billion will surely draw the attention of antitrust regulators and receive intense scrutiny.
At a regular press conference on November 9, the spokesperson for China’s Ministry of Commerce stated that the ministry has taken note of relevant reports. Based on current information, the transaction is still in the negotiation stage.
Margaret Vesgag, a member of the European Commission responsible for competition, responded to a CBN reporter through her press officer, stating that she is currently unable to comment and has not yet received the declaration of the transaction. “Is there a need to inform the Competition Commission that this is the company’s own task?†she asked.
In China, the Ministry of Commerce is primarily responsible for antitrust reviews of operator concentration. The standard is based on the “Regulations on Reporting Standards for Operator Concentrations†issued by the State Council in 2008. According to the regulations, any merger involving both parties must be reported to the competent commercial authority of the State Council in advance; otherwise, it cannot be carried out.
The situation in the EU is similar. According to materials sent by the European Commission to CCP reporters, the EU’s merger control provisions state that if the combined global turnover of the two companies exceeds €5 billion, and each company’s turnover in the European region reaches €250 million, the transaction must be notified to the European Commission.
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