Episode 48: Qualcomm - Broadcom

In episode 48 of Acquired, hosts Ben Gilbert and David Rosenthal discuss the potential acquisition of Qualcomm by Broadcom, a deal that would mark the largest tech acquisition in history at a proposed $103 billion. They delve into the companies' backgrounds, with Qualcomm's revenue from licensing its foundational CDMA technology and Broadcom's history tracing back to HP's semiconductor division. The hosts also explore the broader semiconductor industry, noting the shift towards fabless companies due to the high costs of chip manufacturing, and the increasing trend of vertical integration by tech giants like Apple. Amidst the backdrop of lawsuits and regulatory scrutiny, they speculate on the consolidation drive in the face of commoditization and competition. They touch on the role of private equity, with Silver Lake Partners' $5 billion commitment in convertible debt to finance Broadcom's bid, and the strategic move by Broadcom to relocate its legal address from Singapore to Delaware, likely to ease regulatory hurdles. The episode also highlights the importance of network effects in the semiconductor industry, with standards leading to widespread adoption and market dominance.

• Broadcom's attempt to acquire Qualcomm is potentially the largest tech acquisition in history.
• The acquisition bid was rejected at a price of $103 billion, taking into account the debt involved.
• The deal's progression and potential outcomes are of significant interest.

"Today we are covering what would be the biggest tech acquisition of all time, Broadcom acquiring Qualcomm. And as we record, the current status of the deal was. It was rejected today for a price of $103 billion, not including the, or I guess, accounting for the debt that is part of the deal."

• The quote outlines the central topic of the podcast episode: Broadcom's attempted acquisition of Qualcomm and the rejection of the initial $103 billion bid.

• Both Broadcom and Qualcomm are fabless semiconductor companies, meaning they design chips but do not manufacture them.
• They rely on contract manufacturers for the production of chips used in phones, computers, servers, etc.
• The semiconductor industry is experiencing an IoT (Internet of Things) explosion, with chips being used in a wide range of devices.

"They're both effectively fabless semiconductor companies. So neither of them have fabs, which are the fabrication facilities that actually manufacture the chips these days, with the exception of maybe Intel, Samsung, TSMC, most of the chip designers are not actually the chip manufacturers because it's so expensive to create them."

• This quote explains the business model of Broadcom and Qualcomm as fabless semiconductor companies and highlights the high costs associated with chip manufacturing, which is why most designers outsource production.

• The podcast has a community on Slack with over 1000 members discussing M&A, IPOs, and tech news.
• Listeners are encouraged to leave reviews on Apple Podcasts to support the show.

"We've got a slack where we are over 1000 strong. So if you like to talk about M and A IPOS tech news, or just add another slack, because Lord knows we cannot be in too many of those."

• The quote promotes the podcast's Slack community and its engagement with topics related to mergers and acquisitions, initial public offerings, and technology news.

• The "old" in Silicon Valley refers to the resurgence of interest in the semiconductor sector.
• Nvidia's success with GPUs for machine learning has led to a significant increase in its stock price and market attention.
• Startups like Graphcore are raising substantial funds to compete in the specialized chip market for machine learning.
• The semiconductor industry's growth is driven by startups, major fabs, and legacy chip designers.

"The old that is new is the silicon. In Silicon Valley, there's obviously this deal, which is potentially going through largest technology acquisition of all time, broadcom buying Qualcomm. But that's far from the only thing happening in the semiconductor world right now."

• This quote sets the stage for the discussion on the semiconductor industry's growth and innovation, particularly in the context of Silicon Valley and the Broadcom-Qualcomm deal.

• Apple's move to in-house chip design has impacted the semiconductor market.
• Despite Apple's in-house designs, Qualcomm and Broadcom still supply components for iPhones and other devices.
• The Pixel 2 XL contains various Qualcomm components, demonstrating the continued relevance of these companies in the smartphone market.

"It is actually pretty surprising how many components are made by these companies that are in not only Android phones, but iPhones."

• The quote emphasizes the significant role that Qualcomm and Broadcom play in the supply chain for both Android and iOS devices, despite trends towards in-house chip design.

• Qualcomm and Broadcom are major suppliers for smartphone components.
• Qualcomm specializes in gigabit LTE RF transceivers, power management ICs, and quick charge ICs.
• Broadcom supplies various parts but does not have components in the Google Pixel 2 XL as identified.
• Both iPhone X and Pixel 2 XL use numerous Qualcomm and Broadcom parts.
• The main CPU is the primary area where Qualcomm and Broadcom do not compete.
• Qualcomm and Broadcom compete in areas like radios, Bluetooth, and Wi-Fi components.

"Qualcomm makes the gigabit LTE rf transceiver, the power management integrated circuit, the quick charge integrated circuit, and interestingly enough, I don't think there's any broadcom components in the Pixel two XL, at least not that could be identified by people that are ripping the phone apart."

This quote highlights the specific components that Qualcomm produces for smartphones and notes the absence of Broadcom parts in the Pixel 2 XL.

• The tech industry is complex, with companies often being competitors, collaborators, and partners simultaneously.
• The term "coopetition" describes this phenomenon where companies work together in some areas and compete in others.

"Everybody is a frenemy. Everybody is a competitor. Everybody is in coopetition."

The quote encapsulates the complex relationships between tech companies, where they may be allies in one context and rivals in another.

• Broadcom, known today, originated from Avago Technologies, which was once HP's semiconductor division.
• Avago has a history of mergers and divestitures, reflecting the complicated nature of the semiconductor industry.

"They actually merged themselves with another company called Avago last year. And actually the company today known as Broadcom really is Avago."

This quote explains the merger between Broadcom and Avago, with the latter taking on the Broadcom name despite being the acquiring entity.

• Qualcomm was founded in 1985 by a group including UC San Diego professor Erwin Jacobs.
• The company capitalized on the network effect concept, applying it to cellular telephones.
• Qualcomm's success hinged on the widespread adoption of their CDMA technology in cell phone networks.

"Qualcomm actually stumbled into doing the same thing with cellular telephones."

The quote describes how Qualcomm utilized the network effect, which originally applied to telephone networks, to grow its cellular technology business.

• GSM and CDMA were competing cellular standards with different infrastructure requirements.
• Qualcomm's CDMA technology underpinned both standards, allowing them to profit from the widespread adoption of cellular technology.

"The actual underlying technology behind these standards was all CDMA and Qualcomm commercialized."

The quote clarifies that Qualcomm's technology was fundamental to both the GSM and CDMA standards, positioning the company to benefit from the expansion of cellular networks.

• Qualcomm earns significant revenue from licensing its patented technologies.
• Licensing accounts for a substantial portion of Qualcomm's total revenue.

"Qualcomm's ten k last quarter or last year, was 15.4 billion in revenue from equipment and services and 8 billion from licensing."

This quote provides specific financial figures, illustrating the importance of licensing to Qualcomm's business model.

• Qualcomm transitioned from making base stations and handsets to focusing on chipsets for mobile devices.
• The Snapdragon processor line is a well-known product from Qualcomm.
• As the market saturated, Qualcomm shifted away from handset manufacturing, selling that division to Kyocera.

"Then they end up selling that business, and they go into making chipsets."

The quote summarizes Qualcomm's strategic shift from manufacturing complete devices to specializing in chipsets for mobile phones.

• The semiconductor industry is undergoing consolidation due to high R&D and manufacturing costs.
• Companies are merging to combine their resources and offer bundled products to handset manufacturers.
• Broadcom's attempted acquisition of Qualcomm is part of this consolidation trend.

"We're in this era now where this stuff has gotten so commoditized and gotten pushed down so far in price that we need to see consolidation."

This quote discusses the necessity of consolidation in the semiconductor industry due to the commoditization of components and the financial pressures of R&D and manufacturing.

• Broadcom offered to buy Qualcomm for $103 billion, not including debt.
• The deal was rejected by Qualcomm, likely due to the offer not reflecting the company's intrinsic value.
• Qualcomm's share price was depressed due to ongoing lawsuits, presenting an opportunistic timing for Broadcom.

"I'll make a prediction that this deal will go through at some point somewhere slightly higher than this."

The quote suggests that despite the initial rejection, there is an expectation that Broadcom may eventually acquire Qualcomm at a higher price point.

• The proposed acquisition includes both cash and stock components.
• Qualcomm is also in the process of acquiring NXP Semiconductors for $47 billion.
• Broadcom's offer is not contingent on the completion of either company's ongoing acquisitions.

"The broadcom offer is cash and stock, where it's a $10 of stock and $60 of cash per share for this."

This quote details the structure of Broadcom's acquisition offer to Qualcomm, highlighting the mix of cash and stock in the proposal.

• Broadcom and Qualcomm face regulatory scrutiny from entities like the Committee on Foreign Investment in the United States (CFIUS).
• Broadcom's legal address change from Singapore to Delaware is a strategic move to avoid CFIUS review.

"Broadcom announced that it will relocate its legal address from Singapore to Delaware."

The quote explains Broadcom's strategy to mitigate regulatory challenges by changing its legal domicile to the United States.

• The semiconductor industry is intertwined with U.S. politics, particularly with the Trump administration.
• The industry is perceived as stable but is, in fact, complex with a lot of ongoing drama.
• There is significant change happening within the semiconductor industry.

"how this was sort of highly, highly intertwined with all of the United States recent politics and buddying up to the Trump administration."

This quote highlights the political entanglement of the semiconductor industry with recent U.S. politics, suggesting a complex relationship with the Trump administration.

"Yeah, I mean, I think one thing we can say about this whole industry, as Ben and I started to dive into it today, is that it is massively complex, and there is so much drama going on for what most of tech is just thought of as a relatively sleepy, stable corner of the industry."

This quote emphasizes the unexpected complexity and drama within the semiconductor industry, which contrasts with its public perception as stable and uneventful.

• The discussion categorizes the acquisition as "consolidation."
• The companies involved make similar products and are not acquiring new technologies or product lines.
• The acquisition is about gaining supplier power and preserving margins.

"I'm going to go with other here and just say this is consolidation."

This quote identifies the type of acquisition taking place, which is consolidation, meaning the merging of companies that have similar product offerings.

"It's buying themselves more supplier power against their combined customers and trying to reduce cost to preserve margin."

The acquisition is strategic for gaining more supplier power and cost reduction, which are key motives behind such business moves.

• There was no in-depth financial analysis conducted for the podcast episode.
• Broadcom's valuation is higher than Qualcomm's despite similar profit margins and Qualcomm having higher revenue.
• Broadcom's revenue growth contrasted with Qualcomm's declining revenue could be a factor in valuation.
• The smartphone market saturation and price reductions are impacting the semiconductor industry.

"One thing that I haven't fully wrapped my head around yet is why Broadcom is so much more valuable than Qualcomm."

This quote introduces the puzzle of Broadcom's higher valuation compared to Qualcomm, despite having similar profit margins and Qualcomm having higher revenues.

"Revenues are actually declining for Qualcomm."

The decline in Qualcomm's revenue is highlighted as a potential reason for its lower valuation compared to Broadcom's growth.

• Smartphone market saturation is not contributing to growth.
• Vertical integration by phone makers reduces the market for horizontal component providers.
• Successful customers may choose to develop in-house capabilities, impacting component suppliers.

"The smartphone market is just so saturated. It's not growing and prices are falling."

This quote discusses the challenges faced by the semiconductor industry due to the saturated smartphone market and decreasing prices.

"When phone makers are vertically integrating, it means there's less room for the sort of horizontal providers of the components."

The trend of vertical integration among phone makers is identified as a threat to the business model of horizontal component providers in the semiconductor industry.

• Capital intensity in the semiconductor industry is debated as it can lead to both success and failure.
• Sequoia Capital's investment in semiconductor companies is discussed despite their statement about capital intensity usually leading to nightmares.
• The semiconductor industry has the potential for high rewards despite the high risks and capital intensity.

"Capital intensity usually produces nightmares."

This quote from Sequoia Capital's lessons reflects the conventional wisdom that high capital intensity can lead to business challenges, yet the firm has seen success in the capital-intensive semiconductor sector.

"These are 100 billion dollar companies... the winners are huge."

The potential for significant returns in the semiconductor industry is acknowledged, with successful companies achieving substantial valuations despite the risks.

"You just can't take that many of those companies in a portfolio that breaks the venture model."

The quote discusses the limitations of venture capital investment models in the context of capital-intensive industries like semiconductors, where the risk of failure is high.

• SoftBank acquired ARM for $32 billion, which was a significant investment even though it occurred before the creation of the Vision Fund.
• ARM does not manufacture chipsets but provides reference designs for CPU chipsets, similar to Qualcomm's business model.
• The acquisition of ARM by SoftBank is an example of how standards in technology can lead to network effects.

"SoftBank acquired ARM for $32 billion."

• This quote highlights the acquisition price and the entity involved, indicating the significance of the deal in the tech industry.

"ARM was not a fab, but they made the reference designs for CPU chipsets."

• The quote clarifies ARM's role in the tech ecosystem, emphasizing that they provide designs rather than manufacturing the chipsets themselves.

• Standards in technology, like ARM's CPU designs and Qualcomm's CDMA, can create network effects as more devices and software become dependent on those standards.
• The more widespread the use of a particular technology standard, the greater the network effect, leading to a cycle of increased adoption and development for that technology.

"Standards can lead to network effects."

• This quote encapsulates the idea that technology standards can drive widespread adoption and create a self-reinforcing cycle of use and development.

• The current low-interest-rate environment may encourage highly leveraged deals and consolidation among large companies.
• Companies can use debt to acquire other companies due to the lower cost of borrowing.
• However, the level of leverage observed is not as extreme as it was before the 2008 financial crisis.

"Are we seeing deals like this that are so highly leveraged... because interest rates are so low?"

• This quote poses a question about the correlation between low interest rates and the occurrence of highly leveraged corporate acquisitions.

"I don't think we're quite at those heights yet, but certainly more so than in the software space."

• The quote indicates that while leverage levels are higher than in the past, particularly in the software industry, they have not reached the problematic levels seen before the 2008 crisis.

• There is an ongoing trend of consolidation in the tech industry, with companies either merging or being acquired to avoid being left out of the market.
• Speculation about the future of companies in the face of vertical integration by tech giants like Apple, Google, and Facebook.
• The potential anti-competitive concerns of mergers and acquisitions, especially in the semiconductor industry, are a significant consideration for regulatory approval.

"There's going to be consolidation... they'll probably end up the same company later through some crazy path of consolidation."

• This quote suggests that regardless of immediate mergers or acquisitions, market forces are likely to result in consolidation over time.

"I will be so curious what the story is to regulators of why this is not anti-competitive."

• The quote expresses curiosity about how companies will justify their mergers to regulatory bodies, given potential anti-competitive implications.

• Discussion of personal recommendations, known as "carve-outs," including a furniture store called Big Daddy's Antiques and a historical website about Niagara Falls.
• These personal segments provide insights into the interests and activities of the podcast hosts outside the main discussion topics.

"Big Daddy's antiques is my carve out for the week."

• This quote is a personal recommendation for a furniture store, reflecting the host's positive experience with the store for office furnishings.

"Niagara Falls. The summer of 69, the dewatering of the American falls."

• This quote introduces a historical website about a significant event at Niagara Falls, capturing the host's fascination with the topic and the depth of information available on the site.

• Crusoe is a clean compute cloud provider for AI workloads, partnering with Nvidia and using stranded energy to power data centers.
• The advertisement emphasizes Crusoe's environmental benefits and cost savings for customers due to its unique energy sourcing strategy.
• Crusoe's business model is contrasted with traditional cloud providers, highlighting its specialized focus on AI and remote data center locations.

(Note: The advertisement section is not included in the study notes as per the instructions.)