(Bloomberg Gadfly) -- Broadcom Ltd. needs to start talking about its plans for Qualcomm Inc.'s licensing business -- sooner rather than later.
Qualcomm on Friday said a recent meeting with Broadcom hadn't swayed it from a decision to reject the chipmaker's latest takeover proposal of $82 a share, or $104 billion. This isn’t entirely surprising, as Qualcomm had previously said the proposal undervalued it, and Broadcom had insisted $82 was its best and final offer.
Qualcomm is open to continuing talks, but this seems like a dead end, given Broadcom CEO Hock Tan's reputation for discipline and the financial gymnastics he'll already have to do to make $82 work. That likely leaves the outcome up to Qualcomm shareholders, who will vote on March 6 on Broadcom's proposal to replace most of its target's board.
Qualcomm's recent rebuttal gives them food for thought. What stood out to me were its comments about Broadcom's plans for its licensing business -- or rather the lack thereof. According to Qualcomm, Broadcom "declined to respond to any questions about its intentions for the future of" that operation.
This is important because, while the unit has been mired in a series of antitrust disputes and a legal spat with Apple Inc., it has historically generated the bulk of Qualcomm's operating profit. The business charges fees for the use of patents that span the basic plumbing of phone systems.
It's clear Broadcom doesn't have a particularly high opinion of Qualcomm's licensing business model, with CEO Tan telling Bloomberg the target's management team hasn’t recognized "the real world doesn't work that way anymore." Broadcom has indicated it will radically restructure the operations, if not wind the unit down altogether.
But it hasn't given much detail publicly on how that would work or how any changes would affect Qualcomm's profitability. Apparently, it's not particularly talkative in private with Qualcomm, either.
Many Qualcomm holders agree with Tan that the licensing business model is outdated and that Broadcom could be a better steward. But they'll still want specifics. That's particularly true given Broadcom's reported insistence on controlling all material decisions around Qualcomm's licensing business while a deal awaits antitrust approval.
Broadcom's proposed $8 billion reverse termination fee aside, regulatory sign-off is hardly a sure thing, and shareholders have to think about what they might be left with if the deal falls apart. It's an innately odd dynamic to have a company calling the shots on a business it doesn't technically own yet, and regulators may have something to say about that. But whatever the ultimate degree of control, it's not hard to imagine a situation where Qualcomm has backed off its dispute with Apple at Broadcom's behest and then winds up with a half-finished radical reset and a shell of the formerly lucrative licensing operations.
A bid of $82 will be very attractive for some Qualcomm shareholders, but they'll also want a solid back-up plan if antitrust approval doesn't come through. Broadcom isn't helping itself by being tight-lipped going into this proxy fight.
Also, what about Broadcom investors? Don't they deserve to know what the plan is for the licensing business? The message right now seems to be, "Just trust us" -- and to Tan's credit, a lot of holders do. But at the risk of stating the obvious, if a company in which you own a stake is spending $104 billion to buy something, generally I think you should be bothered enough to ask exactly what it is that the management team thinks it's buying.
There are still many more acts to go in this takeover saga, and if Broadcom wants to win, it should take on more of a speaking role.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Brooke Sutherland is a Bloomberg Gadfly columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.
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