Industry Trend Analysis - Qualcomm: A Deal Too Far For Broadcom - JAN 2018

BMI View : The IoT will require both specialisation and standardisation of u nderlying technologies. This i s a challenge for the semiconductors sector as, to take advantage of mass market opportunities such as connected cars and wearables, chipset vendors will also need to ensure that their products are relevant across a broad spectrum of applications and solutions. Consolidation in the semiconductors industry is, therefore, inevitable, but the purchase of Qualcomm by Broadcom would be a step too far, too soon.

Broadcom has launched a USD70 per share takeover bid for its larger rival, Qualcomm. The proposed deal values Qualcomm at USD130bn. The offer could be raised if Qualcomm accepts and continues with its planned USD40bn purchase of automotive chipset manufacturer NXP Semiconductors ( see ' Connected Cars Should Not Be Qualcomm ' s Sole Focus ' , October 28 2016). We expect that Qualcomm will reject the initial offer, even if it is only a token effort to secure a better deal for its shareholders, but it is likely that Broadcom will seek to leverage its pending USD6bn acquisition of Brocade Communications to secure the requisite financing.

Qualcomm's ability to fend off an aggressive bidder is limited. Its earnings have been shrinking in recent years as it relies less on highly profitable patent licensing and more on lower-margin sales of the physical chips and wireless modems that are its core offerings. Prices for chips are generally trending downwards as the market has come to rely on low-cost components to keep electronic devices affordable. The IoT will put even greater pressure on margins, even though volume sales can only increase as the device ecosystem massively expands to include wearables, connected cars, robots and smart infrastructures, all of which will have an ever increasing need for processors capable of running advanced applications such as artificial intelligence.

Connected Things Require More Sophisticated Chips
Selected Connected Devices By Type (mn), 2015-2050
f = BMI forecast. Source: BMI

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