Qualcomm has issued a letter to shareholders and investors presentation outlining its board's opposition to Broadcom's proposed takeover bid and plans to grow the chipmaker on its own. The offence comes ahead of an AGM in March where Broadcom has proposed its own slate of directors for Qualcomm.
In line with its initial rejection of Broadcom's offer, Qualcomm said the bid "dramatically undervalues" the company. Broadcom's offer of USD 70 per share implies a price-earnings ratio of 10x for Qualcomm, based on the company's targeted adjusted EPS of USD 6.75-7.50 in the fiscal year to September 2019. The EPS forecast implies strong growth for the company over the next two years, compared to a result of USD 4.28 per share last year. Qualcomm said the Broadcom valuation compares to a P/E of 19x for the SOX semiconductor index and recent valuations of an average 22x in industry acquisitions.
The letter also highlights the current management's record. They have overseen a number of acquisitions aimed at expanding Qualcomm's addressable market. In addition to preparing the company for 5G mobile, they've expanded operations to new segments such as IoT, automotive, computing and networking, meaning a more than six-fold increase in the potential market revenues for Qualcomm. In the past three years, the company's also paid over USD 25 billion in returns to shareholders, implemented a major cost-cutting programme and resolved its licensing problems in China.
Qualcomm said it's also confident that it will be successful in its legal battle with Apple, as it has shown in previous licensing battles. The end to the legal troubles, further cost-cutting of USD 1 billion and the pending acquisition of NXP Semiconductors should support solid growth going forward for the company, Qualcomm said. Over the long term, the company targets 6-8 percent annual revenue growth, and adjusted EPS should grow at twice that rate, according to Qualcomm's investor presentation.
Regulatory problems
Qualcomm added in its letter that Broadcom "has no clear path to completion" for the takeover, given it would likely face resistance from competition regulators. Regulatory review would likely take at least 18 months to complete, "if ever", Qualcomm said, and "would likely require meaningful divestitures, ongoing restrictions on the combined entity's conduct, potentially contradictory and irreconcilable demands from regulators, and the transaction could be blocked outright".
Qualcomm and Broadcom are the world's two largest fabless semiconductor companies, with combined sales of over USD 30 billion, nearly three times their nearest competitor. Out of all chipmakers, only Intel and Samsung are larger.
Along with the statement, Qualcomm filed a new investor presentation with the SEC outlining its strategy and targets. The AGM will take place on 06 March, for shareholders of record on 08 January.
Broadcom issued a statement challenging Qualcomm's claims, saying the group's decision to remain a standalone company "fails to address Qualcomm's fundamental business challenges, including its ongoing disputes with customers and regulatory investigations in numerous jurisdictions". Furthermore,
Qualcomm's management "has repeatedly overpromised and under-delivered since the announcement of its 'strategic realignment plan' in 2015, resulting in an inability to meet financial targets as well as deteriorating profitability and destruction of stockholder value".
Broadcom reiterated that it had support from Qualcomm shareholders and customers and initial meetings with antitrust authorities left it confident the acquisition could be completed within 12 months.
