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Broadcom Eyes Replacing Qualcomm's Board, Turning Takeover Hostile

Broadcom is taking the first step in a possible hostile takeover after failing in its $105 billion bid for Qualcomm. Broadcom, flying in the face of the possible regulatory hurdles and Qualcomm’s stern refusal, released a proposal to unseat all 11 of Qualcomm’s board members.

On Monday, Broadcom proposed replacing them with its own nominees. The new board would be in a position to push through the $70 per share deal, which would create the world’s third largest chipmaker and a powerhouse for chips embedded inside cars, smartphones, and basically everything connected to the internet.

Last month, Qualcomm said that its board had unanimously rejected Broadcom's bid for being too low and controversial with antitrust regulators. Now Broadcom is trying to install its own directors with a shareholder vote, which would be something of a referendum on the deal. On Monday, Qualcomm argued that its existing management would pay off in the long run.

Broadcom’s prey is wounded and vulnerable. Qualcomm is embroiled in a bitter battle with Apple, which sued it for charging patent royalties based on a percentage of the total price of the smartphones using them. Apple wants $1 billion out of the lawsuit with Qualcomm, which licenses out the standard essential patents that enable 3G and 4G communications.

Over the last year, the companies have bombarded each other with less serious lawsuits. Last week, the battle spilled out in view again when Qualcomm filed patent infringement lawsuits against Apple in U.S. District Court in San Diego. After a few days, Apple filed a countersuit that claimed Qualcomm’s Snapdragon smartphone chips trespassed on its own patents.

Apple also purchases parts from Broadcom, which analysts predict could revise Qualcomm’s patent licensing business to smooth things over with the world’s most valuable company. The licensing business has also been the subject of intense regulatory scrutiny worldwide. It has caused friction with antitrust cops looking into its $47 billion bid for NXP.

Qualcomm is also getting the cold shoulder from NXP shareholders, which have been clamoring for a higher purchase price than $70 per share. Qualcomm admitted that NXP shareholders had only agreed to tender 2.4% of all the outstanding stock, down from 3.5% when it last extended the tender offer deadline last month. That is far from the 80% required to close the deal.

Unless Qualcomm persuades shareholders that its offer fairly values the world’s largest maker of automotive chips, it might have to sweeten the pot. Both companies have said that they plan to close the deal next year and that it is vital for creating long-term growth in markets like cars and factories in spite of higher development costs and lower margins in chips.

“The nominations give Qualcomm stockholders an opportunity to voice their disappointment with Qualcomm’s directors,” said Hock Tan, Broadcom’s chief executive officer, in a statement. Broadcom said that it would support expanding the board to keep three current directors if all its nominees were appointed at Qualcomm’s annual shareholders meeting in March.

In a statement, Qualcomm did not mince words. The company called Broadcom’s plot “a blatant attempt to seize control of the Qualcomm board in order to advance Broadcom’s acquisition agenda. These nominees are inherently conflicted given Broadcom’s desire to acquire Qualcomm in a manner that dramatically undervalues Qualcomm to Broadcom’s benefit.”

Qualcomm also raised red flags about the potential blowback from regulators. The chipmaker also raised concerns about the debt financing that Broadcom said it could get if Qualcomm accepted the terms of the deal. Private equity firm Silver Lake Partners promised to provide $5 billion in debt financing to Broadcom.

Broadcom is “effectively asking stockholders to foreclose option and make a decision now on a non-binding proposed transaction which could not be completed for well over a year, if ever,” Qualcomm said in a statement. Qualcomm also jabbed at Broadcom’s announcement that it would move its legal headquarters to the United States from Singapore.

Broadcom has not said anything else about the relocation since it was announced last month. It could be a ploy to avert the gaze of the Committee on Foreign Investment in the United States, which acts like a gatekeeper for deals with foreign companies. The agency is particularly harsh on chipmakers, and it delayed Broadcom’s Brocade deal for months.

Many analysts say that a Broadcom takeover would alter how Qualcomm does business, and some of them argue that the acquisition could stifle 5G innovation. Unlike Qualcomm, its "R&D strategy tends to focus on low-risk markets where they can be competitive almost instantly on price and demand,” said chip industry analyst Patrick Moorhead in a recent blog post.

Broadcom said in a statement that it would prefer not to turn hostile. Tan said that “it remains our strong preference to engage in a constructive dialogue with Qualcomm. We have repeatedly attempted to engage with Qualcomm, and despite stockholder and customer support for the transaction, Qualcomm has ignored those opportunities.”

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