What Happens Now in Broadcom’s Proxy Battle for Qualcomm?

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Merger Monday has not turned up any mergers of note, but that doesn’t mean that all’s quiet on the M&A front. Broadcom Ltd. (NASDAQ: AVGO) this morning filed a preliminary Form 14A proxy statement with the U.S. Securities and Exchange Commission. Broadcom, which is to acquire Qualcomm Corp. (NASDAQ: QCOM), will present a full slate of 11 candidates to replace all of Qualcomm’s board of directors at the scheduled March 6 Qualcomm annual meeting.

Qualcomm has already rejected as insufficient Broadcom’s $70 per share unsolicited takeover offer ($60 in cash and $10 in Broadcom stock). In Monday’s filing Broadcom’s offer remains the same.

The filing details meetings between Broadcom and Qualcomm executives, including a first meeting on August 4, 2016, that included Hock Tan, CEO of Broadcom, and Steve Mollenkopf, CEO of Qualcomm. In late October of last year, Qualcomm revealed its offer for Netherlands-based NXP Semiconductor N.V. (NASDAQ: NXPI) at a price of $110 per NXP share in cash in a deal valued at around $47 billion.

Broadcom’s Tan called Mollenkopf in “early 2017,” to let him know that Broadcom continued to be interested in a business combination with Qualcomm that Mollenkopf initially indicated he was not interest in but said he would “reflect on” the idea and get back to Tan. That never happened. Broadcom’s proposal to acquire Qualcomm was sent on November 7 of this year.

Broadcom has said that the outcome of Qualcomm’s bid for NXP will have no bearing on its offer to acquire Qualcomm. That’s undoubtedly good news for activist investor Paul Singer’s Elliott Management, which has also this morning sent a letter from its U.K. subsidiary, Elliott Advisors (UK), to NXP shareholders calling Qualcomm’s bid insufficient, encouraging NXP shareholders to withhold judgment on the Qualcomm bid and putting a value on NXP shares of $135.

If Qualcomm should acquire NXP, there’s virtually no chance Broadcom’s offer of $70 a share will satisfy Qualcomm shareholders, especially if the company has to boost its offer for NXP.

And if Qualcomm fails to get the 67% of shares it needs under Dutch law to buy NXP, wouldn’t Broadcom be overpaying? After all, the Broadcom offer certainly included something to account for a successful acquisition of NXP.

In a comment to CNBC Monday morning, Bernstein analyst Stacy Rasgon noted that a Friday CNBC report that Microsoft Corp. (NASDAQ: MSFT) and Alphabet Inc.’s (NASDAQ: GOOGL) Google may have some concerns about the Broadcom-Qualcomm deal as it relates to Apple Inc. (NASDAQ: AAPL). Perhaps, or perhaps not. Rasgon said:

[T]he [CNBC] article suggested that “Qualcomm has told Microsoft, Google, and other companies not to make any public statements opposing a deal,” as “Qualcomm wants to find out if Broadcom will significantly increase its $70-per-share offer before taking a firmer stance against a possible deal.” But if this is true, would it not suggest the company is in fact in play despite current evidence of non-engagement? And if so, we aren’t sure what is going on here; perhaps we are simply naïve, but in our opinion the best and easiest way for Qualcomm to see if Broadcom might be willing to raise their price would be simply to talk to them…

Rasgon also said the Qualcomm cellular business is Broadcom’s primary objective but that Broadcom remains willing to buy the company with or without NXP. Broadcom also thinks it can handle antitrust and integration issues and can reduce the combined company’s debt without changing the dividend.

There are a lot of moving parts here, and with three months to go before the Qualcomm annual meeting there are plenty of moves that any one of the players could make that changes the plot. Pass the popcorn.