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Breakingviews - Apple has deciding vote in Broadcom-Qualcomm deal
November 9, 2017 / 5:47 PM / 15 days ago

Breakingviews - Apple has deciding vote in Broadcom-Qualcomm deal

NEW YORK (Reuters Breakingviews) - Apple may anoint the winner of Broadcom’s $105 billion bid for Qualcomm. A dispute over iPhone royalties left the U.S. chipmaker vulnerable to an opportunistic offer from its acquisitive rival. Settling could preserve Qualcomm’s independence – but it all depends on whether Apple thinks a bigger Broadcom would be slavishly devoted to the handset maker, or just surlier.

Apple CEO Tim Cook attends the China Development Forum in Beijing, China, March 18, 2017. REUTERS/Thomas Peter

Qualcomm and Apple came to blows over royalties the chipmaker collects on mobile gadgets, most of which use its technologies. The actual payments aren’t disclosed, but analysts generally peg them at about $10 per phone. When Apple filed a lawsuit against Qualcomm and told its suppliers to stop paying these fees earlier this year, it helped push Qualcomm’s share price down by $10 per share, in subsequent months, to the $54.84 at which it traded last Thursday, the day before Broadcom’s interest was reported.

Settling might make the $70-per-share bid less compelling. Analysts project Apple should sell around 250 million phones next year. If it agreed a lower rate of, say, $7.50 per phone, with a post-tax margin of 85 percent, that would yield almost $1.6 billion in profit. Put this on a multiple of 10, and that’s worth about $16 billion – or roughly $11 per share. And that’s before any catch-up payments for previously withheld sums that Qualcomm might be able to claw back.

Should Apple play along? It depends who the $905 billion smartphone maker thinks is a more malleable counterpart. Broadcom Chief Executive Hock Tan is open to renegotiating the Qualcomm contract should it prevail, according to people familiar with its thinking. The promise of $3 billion in annual cost savings from the merger more than defrays the opportunity cost of giving Apple a good deal. Winning the good graces of boss Tim Cook might also result in additional chip sales to the tech giant.

Whatever Tan says, though, his priority is likely to be maximizing the returns on his new acquisition. A big motivation for acquiring rivals is usually gaining heft over customers, and Broadcom already derives over 10 percent of its revenue from Apple. Furthermore, the lengthy antitrust process for a Broadcom-Qualcomm merger means it might be a year before Tan could negotiate properly anyway. The maker may prefer its serfs smaller and more squeezable.

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