(Bloomberg) -- Qualcomm Inc.’s board said discussions with Broadcom Ltd. failed to persuade the chipmaker to sign off on a $121 billion takeover offer, making it more likely shareholders will get to decide on the fate of the deal. At the same time, Qualcomm said it found the meeting on Wednesday to be “constructive,” and that it would be open to further discussions.
“The board remains unanimously of the view that this proposal materially undervalues Qualcomm and has an unacceptably high level of risk, and therefore is not in the best interests of Qualcomm stockholders,” Qualcomm said in a letter to Broadcom Friday.
Qualcomm shareholders are scheduled to vote on a slate of Broadcom’s nominees to the board at a meeting on March 6, giving investors the chance to effectively approve the proposal. If elected, the new directors would be able to override the current board’s opposition to the latest, sweetened offer of $82 a share.
Qualcomm had agreed to the meeting in New York this week on the condition that Broadcom comes ready to talk about a higher price and to explain better how it planned to get sign-off from government agencies around the world. Before the meeting between management, Broadcom insisted that its increased offer was its best and final.
Qualcomm shares were down less than 1 percent to $65 at 10:06 a.m. while Broadcom slid 1.1 percent to $248.97.
Aside from the offer price, Qualcomm’s reservations hinged around antitrust issues. While the board was pleased that Broadcom seemed willing to divest assets beyond what it had initially proposed to avoid competition issues, Qualcomm complained that Broadcom continued to resist agreeing to other commitments that could be expected from regulatory agencies. Broadcom also declined to answer questions about the future of Qualcomm’s licensing business, making it difficult to know what antitrust measures might be required, Qualcomm said.
Qualcomm also dismissed the Broadcom’s offer of an $8 billion break-up fee if the deal fails. The payment, "does not come close" to compensating shareholders for the risk of a botched deal, Qualcomm said.
“Qualcomm’s board is open to further discussions with Broadcom to see if a proposal that appropriately reflects the true value of Qualcomm shares, and ensures an appropriate level of deal certainty, can be obtained,” the company said.
Broadcom Chief Executive Officer Hock Tan will now have to keep working to gather enough support for his assertion that he has a better idea of how to run a chip company than Qualcomm’s current team does. Qualcomm’s management has stuck to its strategy -- one that was once pervasive in the $380 billion industry -- that success is tied to investing heavily and working to expand into new areas.
Tan has had an uninterrupted run of victories as he’s built one of the largest companies in the industry through a string of takeovers. Investors have rewarded his ability to rapidly combine acquired companies and squeeze out more profit. His strategy is based on the belief that chip-industry growth has slowed, and therefore spending needs to be focused and restrained.
That tactic has resulted in a company that reported annual sales of $17.7 billion in the latest fiscal year, up from $2.5 billion in 2013. Net income was $1.9 billion last year. Investors have poured money into Broadcom stock, which is now trading above $250, an almost fivefold advance from where it was before he began his deal spree.
For Qualcomm board, the decision to shun the offer will test shareholders’ faith in management to turn around a business that’s struggled over the past two years. Qualcomm’s board includes Chairman Paul Jacobs -- the son of the company’s founder -- and Steve Mollenkopf, who succeeded Jacobs as CEO. They’re both part of an engineering-focused leadership team committed to taking market-leading mobile-chip technology into new areas such as servers, personal computers and automobiles.
Their task has been complicated by challenges to Qualcomm’s lucrative technology-licensing business, which funds the company’s industry-leading research and development spending. Regulators around the world are fining or investigating Qualcomm, supporting elements of Apple Inc.’s claims in a lawsuit alleging Qualcomm abuses its dominant position in mobile chips. Qualcomm has countered that it expects to win in court over time and overturn some of the more than $4 billion it has been fined.
If no agreement with Broadcom is reached, Qualcomm’s board is “confident” in the company’s ability to continue to execute its growth strategy.
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