The Qualcomm logo sits above the entrance to the company’s trade stand. (Photographer: Denis Doyle/Bloomberg)

Qualcomm Can't Waste Time on a Pointless Takeover Dream

(Bloomberg Gadfly) -- Just say no to tilting at windmills. 

Paul Jacobs, a member of Qualcomm Inc.'s founding family and a former CEO, has approached potential partners that might help him buy the chip company valued at more than $90 billion. This effort, first reported by the Financial Times, comes on the heels of the U.S. government quashing a hostile takeover attempt by Broadcom Ltd. Shares of Qualcomm were trading up Friday on the news.  

Even in this go-go time for equity and debt markets, it is a stretch to imagine how Jacobs, whose position on the board may be precarious, could afford to lead a Qualcomm acquisition. And he shouldn't try.

The takeover fight with Broadcom exposed Qualcomm's fundamental business challenges and left the company with few friends among its shareholder base. A long-shot attempt at a management buyout amounts to Jacobs plugging his ears and ignoring Qualcomm's problems, and it will cost his company time and goodwill it can't afford to waste. 

First, the cost factor. Let's assume Jacobs would have to top Broadcom's first offer of $82 a share, which directors including Jacobs laughed off as too low. Even at that price a buyout would cost $120 billion before accounting for Qualcomm's debt. It was a stretch for Broadcom to afford a deal of that size, and it seems impossible for an individual, even with help from a private equity firm.

The obvious comparison is Michael Dell's 2013 buyout of his company, Dell Inc. But Michael Dell already owned about 14 percent of the company, valued at $3 billion or so at the time, which he rolled into the buyout. And the Dell acquisition was about one-fifth of the possible cost of a Qualcomm takeover. Jacobs and his family own 1.4 million shares and soon-to-vest options in Qualcomm, a 0.1 percent stake valued at less than $100 million. Michael Dell was rich enough to lead his buyout. The Jacobs family is not, unless it has a secret reserve of wealth. 

It's also not clear Jacobs will find the financing help he needs. Foreign financiers seem off the table. The U.S. government spiked a Broadcom deal in part over concerns that a private equity-like approach would hurt the country's technology position. Dell teamed up with private equity firm Silver Lake. But that firm was among the backers of Broadcom's bid. And its participation was based on confidence in Broadcom CEO Hock Tan's ability to improve Qualcomm's profitability and run the company better than existing management. 

Private equity firms don’t make a habit of backing companies that want to escape the public markets so they can continue spending as much as they want on research and development and cling to a business model that has invited repeated fights with regulators and customers. Should Jacobs and Qualcomm CEO Steve Mollenkopf sign a deal with a buyout financier, they would also likely be signing their own exit  agreements. Jacobs' pursuit of a possible deal has already left him in hot water with fellow directors. 

Qualcomm's plan for rejuvenated growth depends on its ability to A) successfully beat Apple Inc.'s legal challenge to its licensing business so it can start collecting royalties again and B) expand into the market for automotive and industrial chips with its $46 billion purchase of NXP Semiconductors NV. That deal is still awaiting regulatory sign-off from China, forcing Qualcomm to again extend the expiration of its tender offer.

It's easy to understand why Jacobs is thinking about buying his company from stockholders. He has a longer-term view than Qualcomm stockholders frustrated at missing out on a historic equity run for chip stocks. Their anger was further stoked by how Qualcomm handled the Broadcom takeover.  There's been some speculation that China could block the NXP purchase as a retaliation against U.S. tariffs on steel and aluminum. If that transaction collapses, Qualcomm is going to have even bigger problems with its shareholders.

It already seems that Qualcomm is going to be embarrassed in a shareholder election next week. A significant number of stockholders will most likely refuse to cast ballots for Qualcomm directors. Weakened shareholder support means it's just a matter of time before another activist investor or would-be buyer comes calling, and Qualcomm has little credibility left. Qualcomm owes a duty to its current owners to come up with a credible plan for the future. It's unwise for the company's former CEO to chase after a dream that can't possibly come true.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.

©2018 Bloomberg L.P.

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