Broadcom’s attempt to purchase Qualcomm is creating instability in the market’s move to 5G cellular technology.
The disruption will be increased if a deal is agreed to or if the board of directors at Qualcomm
is replaced, as the current Broadcom
takeover plan calls for. During such a sensitive time of transition, uncertainty and confusion about the leader in 5G technology could have a waterfall effect on the market.
With the schedule of 5G cellular roll out accelerated by more than a year into 2019, thanks to cooperation of key players like Qualcomm and the 3GPP standards body, wide-scale 5G could be delayed to 2020 or longer.
This instability and uncertainty will cause a reduction in the value of Qualcomm’s various products and licensing divisions, potentially leaving the company in a position of risk. CEO Hock Tan and the leadership at Broadcom must believe that they can overcome these concerns, but the likelihood to do that without damage to Qualcomm seems improbable.
After a second unanimous response from the current board of directors from Qualcomm declined the “last and final” offer from Broadcom for the acquisition, the next step for Broadcom in pursuit of the San Diego company is a hostile takeover that includes a replacement of the board. This is being voted on at the March 6 shareholders meeting.
Playing a game of “what if,” let’s assume Tan and his advisers can make that happen while keeping in mind the lengthy and risky regulatory hurdle that needs to be met to complete it. Many industry analysts believe he would likely restructure Qualcomm’s QTL division, the part of the company that licenses technologies to smartphone makers and other device original equipment manufacturers (OEMs). A goal of this claim was to settle the dispute with Apple amicably and would require a change in the licensing strategy and pricing. The division drives a big part of Qualcomm’s profits but is also the source of much of its legal fight with Apple and regional FTCs.
Immediately after a replacement of the board, with the merger almost assured, current licensing customers to Qualcomm could halt payments to the company, uncertain of the changes new leadership might make to the division. Phone vendors like Samsung, Xiaomi, HTC and others would seriously consider not paying royalties or risk falling behind its competition. If new contracts and rates are to be provided to one customer, each will demand new negotiations take place, a process that will be limited by the speed of approval from regulatory groups and integration of the two companies. Cash flow will slow or drop off, putting working capital at risk for Qualcomm, potentially hurting personnel retention and future product development.
Key carrier decisions would also be affected. Companies like AT&T and Verizon in the U.S., China Mobile and Vodafone in Europe — which are building five-year-plus business models based around the progressive release of 5G technology — would be forced to reevaluate with a Broadcom purchase in play. Operators depend on a continuous cycle of Qualcomm chipset releases and new smartphones to cover all price segments of the market. This expansion of device availability is what allows carriers to populate the 5G networks they are building, getting value from the capital and operating expenditures involved in the upgrade.
But if Hock Tan and Broadcom decide on a different approach, a different release cadence, then the long-term plans these carriers have in place based on those road maps and promises from Qualcomm and phone vendors, the confidence in the investment may be lost, slowing or stopping the aggressive rollout we are seeing today.
Carriers understand the complexity of the 5G transition, and replacing the technology innovation and momentum created by Qualcomm in this space would be nearly impossible this late in the game, even if another player such as Intel
exists with working hardware. The uncertainty of this shift in the market, with no guarantees from the company that has driven previous generational transitions in the cellular space, could bring chaotic reactions from all players.
A crippled Qualcomm organization would have a major impact on device availability for the 5G smartphone market in 2019. It is unlikely that Intel or HiSilicon (the chip design division of Huawei) would be able to provide commercially viable mobile 5G-ready chipsets and modems on the same timeline that Qualcomm has committed to. Intel has been publicly showing 5G demonstrations, including a variant for the Olympics in South Korea, but without the key partnership announcements that Qualcomm has showcased, and Qualcomm claims of having a 12- to 24-month lead in the space, the general consensus is that Intel remains a significant step behind.
Even if Broadcom and Qualcomm decide to amicably move forward with a buyout, there is no assurance around the regulatory approval. The length of time it would take to complete (approved or not) adds another layer of complexity. Using Qualcomm’s purchase of NXP as a comparison point, which is a simpler acquisition in regards to market share and competitive implications, we are nearing the 17th month of pending approval around the globe.
If a similar time frame occurs for the Broadcom/Qualcomm merger, that overlaps at least two full product cycles from Qualcomm’s mobile-chip-design business. That is two generational releases of new chips, with added features, improved performance and better 5G implementations that would be at risk of lower adoption from customers. These phone OEMs that have depended on Qualcomm for high-performance processors over the years might look toward China’s HiSilicon or MediaTek for its next designs. At the end of the regulatory process, approved or denied, the value of Qualcomm’s business could be drastically affected by the continued uncertainty of the potential new leadership.
This is why the current board at Qualcomm has been vocal about the potential hiccups of the regulatory process, despite Broadcom’s claims that it could complete the acquisition in a six-month window. For current Qualcomm shareholders, there are substantial risks of reduced cash flow from processor sales, a halting of licensing payments due to the potential for renegotiating with Hock Tan, and a potential increase in competition from a company like Huawei’s HiSilicon that could take over the growing Chinese chipset market. Deal completion or no, the value of Qualcomm would likely be crushed by the shifts in the phone vendor market and 5G deployment if this level of confusion continues.
Until the March 6 shareholder vote is completed, this nervousness from partners and financial markets will remain. Qualcomm is trying its best to operate with a business-as-usual attitude, but it understands the complications that this entire acquisition path has placed on them.
If the board is replaced by a shareholder vote, every company currently working on 5G cellular technology deployment, including carriers and phone vendors like Samsung, must make some difficult decisions about long-term expenditures and confidence in the future of Qualcomm. If the current board is retained March 6, stability should remain and the road maps, financial outlook and vision for the next three to five years of mobile technology can get back on track, even if Broadcom continues its hostile takeover direction.