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Qualcomm's war may be over, but the casualties are just starting to be calculated

Qualcomm's war may be over, but the casualties are just starting to be calculated
From TechCrunch - March 17, 2018

The epic battle between Qualcomm and Broadcom seems to have reached its armistice, with President Trump using the power of CFIUS to block the transaction this past week, ending what would have been the largest tech M&A transaction of all time.

It may be all quiet on the semiconductor front, but Qualcommand Broadcom will now need to find a path forward to win the peace and secure access to the coming 5G wireless market. Qualcomm faces a daunting number of challenges, including a potential takeover battle waged by the spurned son of its founder. Broadcomwill have to find a new path to use acquisitions to continue its growth.

As with any war though, the damage from this conflict isnt exclusive to the two enemy combatants. The future of corporate governance and shareholder autonomy is now being reevaluated in light of the actions used by Qualcomm in its defense against Broadcoms hostile takeover. In addition, Americas openness to foreign investment is increasingly under scrutiny.

Qualcomm picks up the pieces

Hostile takeovers are always going to be damaging affairs, no matter the outcome. The most important mandate for any board of directorsand particularly for the boards of technology companiesis to identify long-term threats and opportunities facing a company, and guide the executive team toward the best possible outcome for shareholders. Hostile takeovers are firefighting affairsthe discussions of the board are jolted from roadmaps, strategy, and vision to the minute-by-minute tactics of defending the company from marauding invaders.

Qualcomm should be directing its attention to strategy, but it faces additional wars on nearly every front. Its fighting shareholders for its future, fighting Appleand Huawei over its revenues, fighting China over its acquisition of NXP, and now potentially fighting its founders son from a private takeover attempt.

Many of Qualcomms shareholders see the companys performance as disappointing. While its stock has fluctuated over the past six years, todays share price is essentially flat from where it stood in January of 2012. Compare that to Broadcom, which in the same timeframe has seen an increase of about 740%, and the PHLX Semiconductor Sector index, a basket index of the industry, which has seen its value increase by about 280%.

Unsurprisingly, shareholders were enticed by the opportunity to suddenly realize a 35% premium on their shares with Broadcoms $82-a-share offer. Unlike Qualcomms board, shareholders were very interested in accepting Broadcoms offer. In fact, we now know that Qualcomms board knew that it has lost the battle against Broadcom with its own shareholders during the acquisition process. As Bloomberg reported this week:

The votes started to come in on Friday, March 2. By Sunday it was clear that Qualcomms defense had failed.

Four of the six directors Broadcom had nominated were polling so far ahead of their Qualcomm peers that the race was effectively over, according to data viewed by Bloomberg. The remaining two were winning by less substantial margins. Making it worse, Mollenkopf and Jacobs, the architects of Qualcomms standalone plan, had received some of the fewest votes.

Inside the Qualcomm camp, the mood was bleak; assuming the trend continued, the board would lose control of the company at the shareholder meeting.

Broadcoms message was one of quiet confidence. The company knew it had won, one person close to the discussions said. At that point, the person said, it was just a question of by how many votes, and who was going to leave the board.

Broadcom was winning the battle with shareholders, so Qualcomms board shifted to a terrain far more favorable to it: Washington bureaucrats. From the same Bloomberg report, Federal lobbying disclosures for 2017 showing that Qualcomm spent $8.3 million, or roughly 100 times the $85,000 Broadcom spent These werent regulators; these were friends.

In late January, Qualcomms board submitted a preliminary, voluntary, and confidential notice to CFIUS asking for a review of Broadcoms potential board coup. When Broadcom attempted to redomicile to the United States to avoid CFIUS purview (as it would no longer be a foreign company but a domestic one after it redomiciled), the governments anger was palpable and sealed the companys fate. The boards original outreach to CFIUS precipitated the sequence of events that led to Trumps block this past week.

Qualcomms board won the war, but it is still facing a rebellion from its own bosses. The board will be up for election unopposed this week at the companys delayed shareholders meeting. Perhaps taking a page from tomorrows Russian presidential election, some shareholders are withholding their votes from the board slate to show their displeasure with the entire saga. From the Wall Street journal, Institutional Shareholder Services Inc., an influential proxy-advisory firm,in a note to investors late Wednesday, stood by its original recommendation that shareholders vote for four Broadcom nominees for Qualcomms 11-person board, even though the votes wont count.

That shareholder meeting will no doubt be eventful. While the board and the companys execs will argue that they have a strategy moving forward, they confront two other ongoing firefighting challenges and one new one that could be another round of bruising internecine warfare.

Qualcomm is still in the midst of its $44 billion NXP acquisition, which continues to wait on Chinese regulatory approval. The timeline for that approval is still unclear, but even when Qualcomm does receive it, the company will still have to close the deal and actually implement the transaction. That will take significant time and energy.

Broadcom regroups

Shareholder power wanes?

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