**Double-Linked Mergers and Acquisitions Face Antitrust Scrutiny**
By Li Na to Salsa Guo Liqin
One firm rejection, another threat to not give up. The acquisition of new semiconductor companies by Broadcom and Qualcomm may have just begun.
On Monday in U.S. time, Qualcomm rejected Broadcom’s $130 billion offer, citing “substantially low valuation.†In response to a reporter from CBN, Qualcomm emphasized that the strategy led by CEO Steve Mollenkopf and his team could create greater value for shareholders than the proposed acquisition.
Hock Tan, CEO of Broadcom, immediately stated that the company would not abandon the deal. “We still believe the tender offer is the most attractive to Qualcomm shareholders, and we have received encouragement from their response. Many shareholders have already expressed their hope that Qualcomm will discuss the offer with us.â€
Industry insiders who understand such merger operations told the First Financial reporter that it is still unclear whether Qualcomm’s response is a gesture during a crisis or reflects the true sentiment of shareholders. “After all, capital is as hard to predict as people’s hearts.â€
However, Qualcomm also mentioned in its response “taking into account the uncertainty of follow-up supervision.†Clearly, this $100+ billion merger will inevitably attract attention from antitrust authorities.
**Broadcom’s Pursuit of Qualcomm**
A week ago, Broadcom, a U.S. communications semiconductor chip company, suddenly submitted a tender offer to Qualcomm, causing great concern within and outside the industry.
From a volume and technical strength perspective, the two are comparable. According to Gartner's 2016 semiconductor revenue ranking, Broadcom ranked fifth and Qualcomm third. Both are leading mobile internet processor companies and hold key patents in the communications field, as well as IoT chips.
Wang Xuan, a former employee at Broadcom, told the First Financial reporter that Chen Fuyang was no ordinary person. He had previously stated he wasn’t part of the semiconductor industry but knew how to make bold statements. “Chen Fuyang bought Broadcom after a direct 25% price increase; if customers disagreed, they were sold out directly. Major customers like Huawei were even required to place orders for future demand to guarantee old prices.â€
Broadcom’s response still shows a high level of confidence. It stated that Moelis & Company LLC, Citibank, Deutsche Bank, JP Morgan Chase, Merrill Lynch Bank, and Morgan Stanley served as financial advisors, while Wachtell, Lipton, Rosen & Katz (a top-ranked law firm) and Latham & Watkins LLP (a rising international law firm) acted as legal advisors.
Of course, besides financial backing, Broadcom’s confidence comes from Qualcomm’s own challenges.
Wang Xuan told the First Financial reporter that Qualcomm’s board, representing management interests, refused the offer to meet expectations. However, Qualcomm’s shareholder structure is very fragmented, with most funds ahead. He believes that in the case of Qualcomm’s lawsuits and declining performance, Broadcom is taking advantage of the mindset of fund managers who had previously enjoyed good times before making a high-profile move.
Qualcomm’s fourth-quarter and full-year 2017 financial results showed that its fourth-quarter revenue was $5.9 billion, down 5% year-on-year, and net profit was $168 million, down from $1.599 billion in the same period last year — an 89% drop. For the full fiscal year 2017, Qualcomm’s total revenue was $22.291 billion, down 5%, and net profit was $2.465 billion, down 57% from the previous year.
Externally, Qualcomm’s business model is under pressure. “Previously, Qualcomm could subsidize high R&D costs through large royalty income, keeping technology at the forefront. But now, this model is being challenged by major companies and local governments. Qualcomm charges based on the overall price of the phone, even though high-end chips only make up a small portion of the cost,†said Chen Zihao, an IP analyst at a global IP information service provider. He also noted that Qualcomm’s lawsuit with Apple affected several quarterly results.
The First Financial reporter found that 2014 was a turning point for Qualcomm. In fiscal 2014, its operating income was $26.5 billion, and net profit was $7.97 billion. Since then, revenue has been decreasing, dropping to $22.391 billion in FY2017. Net profit fell from $5.3 billion in 2015 to $5.7 billion in 2016, then to $2.465 billion in 2017.
“In fact, the fundamental reason for the acceleration in M&A in the semiconductor industry is that gross profit is falling, and high-tech stars will soon become ordinary parts suppliers,†Wang Xuan said. Even in the pursuit of scale, even star companies like Qualcomm may face the fate of being acquired. “Qualcomm’s product line is too narrow and its business is too concentrated. That’s the opportunity Broadcom saw.â€
“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 added that Broadcom acquiring Qualcomm is a must, and Broadcom’s experience and operations in the capital market may 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 development 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.
In fact, with declining performance, the semiconductor industry has seen extremely fast 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. These deals mainly aimed to increase scale and competitiveness in mature markets.
In 2016, more than 60 M&A transactions were announced, with 49 completed by year-end. Three of these transactions accounted for over 75% of annual M&A activity, including Avago’s $37 billion acquisition of Broadcom (formerly Anwargao); SoftBank’s $32 billion acquisition of ARM Holdings, a semiconductor IP supplier; and Western Digital’s $19 billion acquisition of SanDisk.
SEMI reported that in 2017, over 12 semiconductor industry transactions were expected to complete, valued at more than $93 billion. The largest M&A transaction expected in 2017 was between Qualcomm and NXP Semiconductors, valued at $47 billion — the largest in Qualcomm’s history. The second-largest was Analog Devices Inc. and Linear Technology Group’s $14.8 billion deal. Together, these two transactions accounted for 66% of the total global M&A in 2017.
The association stated that for years, M&A in the semiconductor supply chain between equipment and material suppliers has continued. As integration between equipment manufacturers, foundries, and fabless companies increases, further price pressures and tougher negotiations may force suppliers to expand their proximity to sustainable growth opportunities in emerging markets.
However, if the Broadcom and Qualcomm deal is finalized, the scale of M&A in 2017 will far exceed the association’s forecast.
“The capital market is greedy and cruel, but the power of the market is the most efficient institutional arrangement. If you don’t perform well, you may be acquired. There is always a whip behind management,†Wang Xuan said.
The integration of giants still faces another risk factor: antitrust regulation.
In its response, Qualcomm stated that “it also takes into account subsequent regulatory uncertainties.†Obviously, this refers to the anti-monopoly review risk associated with a $100+ billion merger. Not to mention that in the past three years, Qualcomm itself has been investigated by competition agencies in major jurisdictions including China, the U.S., and Europe due to its business practices or models, and has received significant fines in important markets such as China, Japan, and South Korea.
Regardless of the standards applied, mergers and acquisitions worth over $100 billion will surely draw the attention of antitrust regulators.
At a regular press conference on November 9, the spokesperson of the Ministry of Commerce of the People’s Republic of China reported 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 this 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 Concentrated Reporting Standards for Operators†issued by the State Council in 2008. According to the regulations, any “all-in-one†merger should be reported to the competent commercial authority of the State Council in advance, and no application is required for centralization.
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 euros, and each company’s turnover in the European region reaches 250 million euros, the transaction must be notified to the European Commission.
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