QUALCOMM, Inc. (NASDAQ: QCOM) Should Reject Future Broadcom Offers

December 26, 2017, 09:08 am ET, BY Simon M.- Contributor| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

QUALCOMM, Inc. (NASDAQ: QCOM) shareholders are getting ready to vote for the company’s board of directors on March 6, 2018, which could be critical to the success of a potential takeover bid from Broadcom Ltd (NASDAQ: AVGO). Although Broadcom’s initial acquisition offer was rejected, the company has not ruled out a hostile takeover bid, which could be executed through a proxy fight for crucial board seats.

Article Summary

Qualcomm shareholders should not accept a takeover bid from Broadcom.

The two companies have different operating models, which do not favor QCOM.

QCOM shareholders would be shortchanged by accepting Broadcom shares.

Here’s the trading report on QCOM.

I believe that Qualcomm shareholders should reject any offer from Broadcom, including the proxy fight for board seats because of some key fundamental differences in the manner in which the two companies operate.

Qualcomm is a company that operates with a long-term horizon and invests heavily in research and development of new technologies in anticipation of future technology trends. On the other hand, Broadcom is a company that operates with a short-term outlook where it grows its revenues through acquisitions, while allocating a tiny budget to R&D activities.

Based on the rejected takeover bid, Broadcom was offering to acquire Qualcomm in a cash and stock offer, which means that Qualcomm shareholders would have gotten Broadcom shares and cash. However, given Broadcom’s focus on short-term gains from capital transactions, it is quite likely that the highest returns from the new merged entity would be generated in the first three years, which has been the case with Broadcom’s previous acquisitions.

It is clear that Qualcomm shareholders would be shortchanged as Broadcom would split up the company and sell all the underperforming business units in order to remain with the profitable units. This is almost certain given that Broadcom did the same to Broadcom’s IoT division after it was acquired by Avago.

The fact that Broadcom barely invests in R&D means that Qualcomm could fall behind its competitors in the semiconductor industry, which would benefit Apple Inc. (NASDAQ: AAPL) to a large extent. Most phones that operate on Google’s Android platform depend on Qualcomm chips to keep up with Apple chips, therefore, iPhones would leapfrog Android phones if QCOM does not keep developing new chips.

It is for the above reasons that I strongly urge Qualcomm shareholders to reject any future acquisition deal from Broadcom.

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