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3 Reasons Why a Broadcom-Qualcomm Deal Makes Sense, and 3 Big Questions

Even for a company with an M&A history as prolific as Broadcom Ltd.'s (AVGO - Get Report) , an unsolicited $100 billion plus-offer to buy Qualcomm Inc. (QCOM - Get Report) -- a company that's trying to close a $47 billion deal to buy NXP Semiconductors NV (NXPI - Get Report) -- is pretty stunning.

Chances are that Broadcom is motivated to make such a bold move not only by the top and bottom-line benefits a deal could deliver -- and they are quite substantial -- but also by a recognition that time might be of the essence for such a bid. Both because of where Broadcom's shares stand following a 50%-plus 2017 run-up, and where Qualcomm's stand as worries about both the NXP deal's closing and its patent-licensing disputes with Apple Inc. (AAPL - Get Report) and others scare off risk-averse investors.

Multiple publications report Broadcom, which on Nov. 1 announced it would move its headquarters back to the U.S. from Singapore, is prepping a cash/stock offer for San Diego-based Qualcomm that would value the latter at around $70 per share -- a 27% premium to Qualcomm's Nov. 2 close. The Wall Street Journal states a massive 80% to 90% of the deal's payout would consist of cash, and that the bid could be launched over the weekend.

In response, Qualcomm shares rose 12.7% on Friday, Nov. 3 to $61.81, a level that suggests a healthy amount of skepticism remains about Broadcom's ability to pull off the deal. Broadcom, which was already making new highs in response to top customer Apple's strong September quarter earnings report, added to its gains following the reports and closed up 5.5% to $273.63.

Separately, a few hours after Broadcom-Qualcomm reports emerged, the WSJ reported Marvell Technology Group (MRVL - Get Report) , which competes against Broadcom in the connectivity chip and hard drive/SSD controller markets, is in talks to merge with Cavium Inc. (CAVM - Get Report) , which competes with Broadcom in the network processor market. Naturally, shares of both companies popped on the news.

What makes Qualcomm such an appealing target to Broadcom, which is hardly in desperate need of another deal? I think the selling point fall into three categories:

  1. Cost synergies

Broadcom -- known as Avago before it acquired Broadcom for $37 billion in early 2016 and took its name -- has been nothing if not incredibly effective at wringing out cost savings from the many chip and component makers it has bought over the last several years. In the case of the old Broadcom, which did 2014 sales of $8.4 billion, the company set a goal of attaining $750 million in annual cost savings within 18 months of the deal's closing.

Though Qualcomm's chip division (QCT) carried out major layoffs last year, the new Broadcom likely sees more room to cut costs, in part by consolidating overlapping R&D and administrative functions. QCT posted fiscal 2017 (ended in September) sales of $15.4 billion.

  1. Product synergies and negotiating power

A Broadcom-Qualcomm merger would create a mobile chip colossus. Qualcomm is by far the world's largest supplier of 3G/4G modems and system-on-chips that pair a modem with an app processor, and also sells a number of complementary parts. Broadcom is the top supplier Wi-Fi/Bluetooth combo chips for mobile devices, and is also a major supplier of RF chips and modules for high-end phones. It also supplies mobile OEMs with touchscreen controllers, NFC chips and -- in the case of the iPhone 8 and X -- wireless charging chips.

A deal could also have some data center synergies: Broadcom supplies OEMs and cloud giants with a variety of Ethernet, storage and optical chips and components, and Qualcomm is working to land design wins for its just-launched Centriq server CPU line. And should Qualcomm's purchase of NXP -- the largest player in a growing automotive chip market -- close, there would be plenty of value in fusing NXP, Qualcomm and Broadcom's automotive product lines.

In addition to giving Broadcom the chance to pitch OEMs on soup-to-nuts solutions (or something close to it), creating expanded product lines would give the post-merger company a lot of negotiating power with OEMs. Especially in mobile, where Apple and Samsung are known to drive hard bargains with suppliers.

  1. Qualcomm and NXP's low valuations

Though Qualcomm's fiscal 2017 earnings hurt by decisions by Apple and another major licensee (possibly Samsung) to stop paying royalties on phone sales, net income still totaled $6.4 billion. And on average, analysts see NXP, which Qualcomm aims to purchase with the help of a $38 billion cash balance, delivering 2018 net income of $2.5 billion.

If Qualcomm can achieve even semi-favorable settlements for its licensing disputes and hit its goal of getting $500 million in NXP-related cost savings within two years of the deal's closing, the combined company could easily see over $11 billion in profits. And Broadcom, of course, could obtain additional cost savings.


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