Meet Silver Lake Partner Who Helped Engineer Qualcomm Bid
(Bloomberg) -- Hock Tan is the man most associated with Broadcom Ltd.’s $105 billion offer for Qualcomm Inc., but he couldn’t have mounted the audacious bid without Silver Lake managing partner Ken Hao. It was Hao who recruited Tan and helped him become one of the firm’s most favored executives. And it was Hao who originally approached Qualcomm.
Over the past dozen or so years, the two men have helped Silver Lake generate huge returns and turn the Silicon Valley PE firm into a leading actor in the rapidly consolidating chip industry. Now the duo’s partnership is being tested as never before. Qualcomm’s flat-out rejection of the deal has forced the bidders to go hostile. That’s unfamiliar territory for PE firms, which generally abandoned unfriendly takeovers about two decades ago when competition to win over management teams started steadily heating up.
“It is unusual,” said Steve Kaplan, a professor at the University of Chicago Booth School of Business. “The activists have tended to be the hostile folks and the private equity investors have tended to be on the friendly side because it’s hard to get a deal done if you are hostile these days.”
Hao is one of five Silver Lake managing partners -- the firm has no chief executive -- empowered to cook up their own deals. Hao plucked Tan from relative obscurity back in 2006 to run an ailing chip company spun off from Hewlett-Packard. Hao shared Tan’s conviction that the chip business had matured and needed to abandon a costly obsession with expanding into new areas. Over the next few years, Tan proved the case by focusing on Avago’s core strengths and turning the former HP division around.
In 2013, the two men met at Tai Pan restaurant in Palo Alto, California, about four miles from Silver Lake’s headquarters on Sand Hill Road. The restaurant, a Hong Kong-style dim sum place with white linen tablecloths, is a favorite of Tan’s. In Cantonese slang its name means someone who has made it big.
Over their meal, Hao made a pitch. While Avago was still relatively small, accounting for less than 1 percent of overall chip industry sales, Hao said it was time for Avago to start rolling up chip companies. The industry was fragmented and rife with small players, often founder run, struggling to grow as their costs rose, prices stagnated and their customers got bigger. Hao’s pitch foretold the consolidation to come.
“We conceived the second chapter,” he recalled in an interview.
The men focused on whether they could pull off a takeover of LSI Corp., a maker of chips that control computer storage devices. In 2014, Avago acquired the company for $6.6 billion, with Silver Lake cementing the deal with $1 billion of convertible debt. Overnight it doubled Avago’s revenue and set the stage for that company’s deal with Broadcom, consummated in 2016 for a then record industry price of $37 billion. (Silver Lake didn’t participate in that deal.)
Time and again, Hao has acted as Tan’s emissary to potential targets. He brought in the then CEO of LSI for the first approach and also helped win over Broadcom’s founders, key to winning support of a huge block of its shareholders. In the spring of 2016, he had the first meeting with Qualcomm Chief Executive Officer Steve Mollenkopf, in an initial attempt to get a conversation rolling.
This time, talks fizzled out, prompting Broadcom to make an open $70-a-share proposal that was quickly rebuffed. The suitors have since nominated directors to Qualcomm’s board in an attempt to appeal directly to shareholders.
That has put Tan and Silver Lake in uncharted territory. It’s the first time the private equity firm has backed a hostile takeover. In a testament to the managing partners’ commitment, the firm is set to invest as much as $2.5 billion in the deal, its biggest equity check yet, people with knowledge of the matter have said.
Getting the deal done will require Tan and Hao to persuade Qualcomm shareholders that the chipmaker needs a new strategy. Tan believes the company should focus on the core mobile chip business; Qualcomm is busily diversifying into other businesses, including servers and personal computers.
Having watched Tan turn Broadcom into a powerhouse, Hao says his partner is best suited to lead Qualcomm’s next chapter. “No one,” he says, “has executed on consolidation in the semiconductor industry with the success and scale and rapidity of integration as Hock Tan.”
If past is prologue, Silver Lake has sufficient appetite for risk to try to bring Qualcomm to heel. In 2013, the firm ponied up $1.4 billion to help Michael Dell take his eponymous company private; two years later Silver Lake invested an additional $1 billion for Dell Inc. to acquire EMC Corp., the biggest-ever tech deal at the time.
©2017 Bloomberg L.P.