Will Broadcom become a Chipzilla or is the deal DOA?

The Broadcom bid for Qualcomm is the biggest, boldest semiconductor deal to date. Just when we thought semi M&A was cooling off, this deal is a years worth of deals rolled into one. Not only does this deal upset the current balance between chip suppliers and customers, it would create a giant entity smack in the middle of IOT, AI, AR & VR roadmaps.

Broadcom has gone through a huge number of acquisitions and is clearly more focused on squeezing returns for shareholders out of acquired assets than future technology, or organic growth.

This is clearly juxtaposed to Qualcomm’s approach. Broadcom is also playing a very smart game taking advantage of current political climates as well as recent drops in Qualcomm’s valuation and standing in the industry.Timing is everything in life….

Although the kneejerk reaction is to say the deal won’t get done, the reality may be much more complex and surprising much as the current administration does not follow the normal rulebook. We have to throw out the logic associated with years of deal approval and disapproval and focus instead on the current administration’s agenda. We think a lot can be learned from recent events that may sway the odds of the deal

The art of the deal….
We have to applaud the stagecraft, planning and sheer chutzpah of Hock Tan CEO of Broadcom who played his appearance in the oval office with “The Donald” for all it was worth. Saying how great it was to move the domicile of Broadcom back to the US (like it makes a real difference) and how wonderful things were going to be and all the jobs that would be created.

It was such a thin veneer covering of the real reason for the move to almost be laughable. Obviously moving Broadcom back to the US avoids the CFIUS (Committee on Foreign Investment in the US) review of Broadcom’s $5.5B acquisition of Brocade as Broadcom will no longer be a “foreign company” with just the flick of a pen.

Broadcom rightly figured out that the odds of even getting Brocade done were near zero after CFIUS recently rejected the Lattice deal. (Our note on the Lattice deal collapse)

They then came up with a “plan B” that was both simply obvious as well as too attractive to the Trump administration to turn down. A “Win/Win”.

It was a great deal for both sides; Broadcom gets Brocade and Trump claims jobs creation and companies coming back to the US due to tax reform (even though tax reform had nothing to do with it…) Then the bombshell of the Qualcomm acquisition drops the next day and things become even more audacious and the oval office photo op looks like a trojan horse for the Qualcomm deal. Hock Tan obviously took some pages out of the “Art of the Deal” playbook as he may end up with a huuuuge deal. Broadcom may have surreptitiously suckered the administration into approving the Qualcomm deal.

“There are some things that money can’t buy. For everything else , there’s politicians…”

“Becoming a monopolistic communications chip behemoth: $100B…. Publicly kissing Trump rump in oval office: Priceless…”

The price of Hock Tan’s public butt kiss in the oval office was obviously the approval of the sale of Brocade to a now, newly converted US company personally approved by the President. Anyone in the DOJ would be suicidal to step in the way of that deal now especially with CFIUS out of the picture. All with the stroke of a pen and a 5 minute appearance.

But wait…there’s more…
Exactly how hard is the DOJ going to look at the Qualcomm deal now that there’s kissy face video of the president and the CEO of Broadcom. It would be beyond suicidal for even Jeff Sessions to question the deal let alone some lower level DOJ “lifer”. Hock Tan and Broadcom are now the face on the milk carton of the tax reform movement, the centerpiece of the Trump administrations whole “raison d’etre”.

Even Trump himself can’t question the Qualcomm deal as he is now pregnant with Broadcom as the face of corporate tax reform. Well played Hock…

Killing more birds with the same stone…
Although we would never accuse the administration of being cynical, devious and strategically thinking, there are some side benefits that they might not have even thought of to approving the Broadcom Qualcomm deal…

Usually, deals get rejected if the customers get screwed by combined entities that have too much market dominance or pricing power over customers or competition that is reduced.

In the case of Broadcom/Qualcomm, the big customer with the most to lose is clearly Apple. Right now Qualcomm is in a costly war with Apple and it appears Apple has the upper hand as evidenced by Qualcomm’s stock. However, if Broadcom and Qualcomm merged the combined entity would have more leverage over Apple and they would likely be forced into a more equitable arrangement as Apple would have a really hard time excluding both Broadcom and Qualcomm devices from their Iphones and other products.

However, Tim Cook is not a friend of the Trump administration and could be viewed as an enemy so exactly how far is the DOJ going to go to protect Apple or even listen to their concerns and complaints about the combined entity of an administration friendly company? Those complaints may wind up in the circular file…

Even before the Trump administration took power, the DOJ listened to customers concerns and killed deals because of this. Cases in point were the AMAT/TEL deal and the KLAM deal, both killed by Intel’s complaints about suppliers ganging up.

If the administration were vindictive & nasty (not that anyone would ever think that of them….) they might even want to screw over Apple by approving the Broadcom/Qualcomm deal just to spite Apple…

Maybe Tim Cook better get some production in the US, pronto, and show up to the photo shoot with the President and make nice…

“Deja Vu, all over again”
Its not like we haven’t seen the semiconductor industry “photo op” with the President in the Oval Office before. Not that long ago, back in February, BK, CEO of Intel made the same trip, to the Trump Oval Office, to announce the reopening of fab 42 , the same exact same fab that Paul Otellini, Intel’s prior CEO announced standing next to Obama in 2011. This is both a repeat Deja Vu and “fake news” at the same time… (see our note on the BK/Trump Fab 42 announcement)

It may clearly behoove other silicon valley tech titans to make the oval office, butt kissing, photo op, fake news, pilgrimage lest they get put on the enemies list and not get their deals done. Silicon valley, generally speaking, is not on the administrations friends list right now.

The AT&T / Time Warner lesson
The latest twist in the ATT/Time Warner deal is that the DOJ now wants the combined entity to jettison CNN or DirecTV. To be clear, the president never liked this deal from the start as he openly questioned it. We find it an amazing coincidence that the President loves Fox news and has come to hate CNN as “fake news” even more than before. While casting off CNN is unlikely to change their editorial view it may send a not too subtle message.

Far be it from me to suggest that politicians “weaponize” purely administrative functions to suit their own goals.

Where’s the beef?
We are very dubious as the the $20B of revenue that Broadcom will be bringing to the US as part of the deal to benefit US citizens. We have an even harder time trying to come up with what “manufacturing” jobs may be created by Broadcom changing its address on paper. Maybe printing jobs for Broadcom’s stationary supplier but little else. Given that the tax reform bill is in trouble before it even starts, its difficult to suggest that future, potential, tax reform was even a tiny factor in Broadcom’s move.
It was all just political showmanship…

The Stocks
Although theres a very long road to go to getting the Qualcomm deal done, we think Brocade is clearly a done deal. The odds of Qualcomm getting done are probably better than most arbs likely think and the kneejerk negative reaction about the creation of a com chip monopoly may be overridden by an administration that will go easy on a friend.

Its clearly a negative for Apple and a negative for other significant chip buyers. Broadcom has previously shown a willingness to quickly jettison parts of an acquisition that it thinks don’t contribute and perhaps they could come up with a sacrificial divestiture bone or two to throw the DOJ to make it look like the DOJ is doing their job.

The chip industry will be forever changed and Broadcom will become an overnight behemoth. It will be even more amazing to see the Lattice deal rejected yet the Broadcom deal approved.

We would give Broadcom a lot of credit for an amazingly smart move and would not underestimate their odds of success and “working” the politics of the situation as they have clearly already shown. Its clear that merger approval is much more political and less objective than previous history would imply and thus we can’t use that as a gauge of Broadcom’s odds. Right now we would give a fair amount of credit to Broadcom’s stock as well as Qualcomm given the better odds.

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