February 27, 2018

Breakingviews: Qualcomm Slaps Broadcom With Two Herculean Labors

by Breakingviews.

The labors set by King Eurystheus for Hercules were meant to be impossible. The terms Qualcomm has set for hostile suitor Broadcom are in a similar vein. Unless Broadcom boss Hock Tan can call on the same superhuman assistance as the mythical Greek hero, Qualcomm’s gesture of cooperation doesn’t much increase the odds of a successful takeover.

Qualcomm’s chairman, Paul Jacobs, said on Monday that with a few tweaks, rival chipmaker Broadcom’s offer of just under $120 billion would be palatable. Most of the requests are pretty reasonable, like boosting the fee Broadcom would pay if a deal fails to 9 percent of the acquisition’s value including debt – around $13 billion at the current price, or $5 billion more than Tan has offered. Likewise, a request to do whatever regulators require to seal the deal, within reasonable limits.

Jacobs may have more in mind than simply being helpful. Next week, Qualcomm shareholders will vote on whether to let Broadcom storm its board with a slate of six directors. An appearance of reasonableness is therefore paramount. The last thing Qualcomm needs is to seem implacably opposed to an offer at least 20 percent above the current share price.

Nonetheless, Qualcomm is slapping Broadcom with two Herculean labors. One is finding the right price. Qualcomm says that even if its other terms are met, Broadcom’s $120 billion is “materially” too low – a word that sets a high bar, given Tan described his last offer as “final.” Jacobs is offering Broadcom a look at Qualcomm’s non-public books, which could justify a higher offer, but could also limit Broadcom’s ability to talk publicly about the merger during the period before investors vote on the board.

Then there’s the regulatory risk – the equivalent of Hercules’ final journey to hell to bring back the three-headed Cerberus. Qualcomm’s latest conditions, agreeing to talk but only with a bigger break fee, look carefully calibrated to ensure that if regulators kill the deal, which is highly possible, Jacobs and his fellow directors won’t have too much egg on their faces. In other words, it looks like Qualcomm is betting that whatever happens, Broadcom needs something akin to divine help.


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