On BRCM(AVGO) attempting to acquire QCOM

My partner Alexis and I had this interesting debate about BRCM(AVGO)'s attempt to acquire my former employer, QCOM.

His argument is quite straightforward: QCOM is bigger than BRCM so it could turn around and acquire BRCM.

While that is true in theory, keep in mind that AVGO already pulled the small-eat-big trick off successfully when it acquired, to the surprise of many of us, the much larger BRCM last year for $37B. In that deal we realized something very important in the M&A dynamics: the equity ownership distribution.

What happened in the AVGO-BRCM deal was that BRCM had a normal, largely distributed ownership as most large public companies (excluding the special cases such as Facebook). AVGO, on the other hand, was backed by a large shareholder, famed private-equity group Silver Lake. This allows AVGO to make an offer, with additional capital committed by Silver Lake, to BRCM's shareholders that was very difficult to refuse.

The same trick would probably work with QCOM as well. It's not like QCOM's shareholders are passionate about QCOM, a dividend paying large corporate whose share prices haven't moved much for the past 5 years. It's money business. And BRCM(AVGO) could offer a premium that most QCOM shareholders would happily vote yes to, despite that might not be in the best interest of either QCOM or BRCM, much less for the executive team at QCOM, many of whom I had worked with during my QCOM days.

This explains why, after QCOM rejecting the $103B initial offer by BRCM yesterday, its share price did not fall back to the pre-offer level and the market cap held steady at $97B. Wall Street is expecting a new offer from BRCM and a non-zero probability for the deal to go through.

This is also probably what's on the mind of QCOM board and executives when they turned down the $103B. It's not like they do not understand the potential of this deal going through. They definitely do. Turning it down is just a first step in negotiation to get themselves a better exit package as well as a better price for its shareholders.

I'll return to this point when the show goes on.


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