Tuesday, November 07, 2017
For years, Hock Tan studiously avoided the limelight, even as he built a onetime division of Hewlett-Packard into what is now Broadcom, a semiconductor maker whose chips help power the newest iPhone.
Yet there he was last Thursday, standing beside President Trump at the White House and announcing plans to move his company’s legal headquarters from Singapore to the United States. Mr. Trump heralded the move as an endorsement of his business-friendly tax plan and called Broadcom “one of the really, great, great companies.”
On Monday, another reason for the move became apparent. Mr. Tan announced that his company had offered to buy another major chip maker, Qualcomm, for $105 billion, in what would be the biggest takeover in the history of the technology industry. The combined company’s products would touch nearly every smartphone in the world.
It is a deal that may be more likely to receive regulatory approval with Broadcom based in the United States — and with the president on Mr. Tan’s side.
But Broadcom’s takeover bid comes as big technology companies are facing ever more political scrutiny. Politicians have been voicing concerns about the influence of technology companies, while President Trump has taken a dim view of foreign acquisitions.
Mr. Tan has long been known as a savvy deal maker who led consolidation in the chip industry. If he pulls this deal off, his political maneuvering could be used as a sort of template for other executives.
Complications are already adding up. Qualcomm is expected to reject the bid as opportunistic and too cheap. And analysts and investors have raised the prospect that a merger of the two companies might be blocked by government regulators, either on antitrust grounds or because Broadcom could still be considered a foreign company buying sensitive technology.
But Mr. Tan and his team have already made moves to address some of those issues. Publicly, Broadcom said the plan to move its legal headquarters to the United States was tied to Republican efforts to overhaul the tax code, including the cutting of corporate tax rates. But getting on the good side of the Trump administration — which will have a say in takeovers like the Qualcomm bid — was another factor, according to a person briefed on the matter.
In an interview, Mr. Tan, 65, played down any connection between his headquarters announcement at the White House and the Qualcomm bid, asserting that the timing had been coincidental.
“We think very long term,” he said. “What we perceive is that the business environment has steadily improved. As we want to grow our business in the long term, that makes it easier to choose to redomicile in the U.S. to sustain our growth trends.”
That Mr. Tan is in the driver’s seat for consolidation in the chip industry reflects his unlikely rise in the technology world. At the White House last Thursday, he recounted being “an 18-year-old skinny kid” from Malaysia who had been able to attend M.I.T. only because he won a scholarship.
He eventually jumped into the chip business, showing off a mastery of operations and an eye for high finance and deal making. Mr. Tan ended up at Broadcom’s predecessor, Avago Technologies, in 2006, soon after the investment firms Silver Lake and KKR bought the company. Avago’s corporate history can be traced back to Hewlett-Packard.
Much of Mr. Tan’s tenure since then has been spent thinking about the long-term future of the semiconductor business. He has long been a proponent of consolidation, buying established chip franchises with healthy profit margins and selling off the parts that are not financially successful.
Mr. Tan’s deal-making streak began in earnest in 2013, when Avago bought LSI, a maker of networking chips, for $6.6 billion. Two years later, Avago bought Emulex for $606 million, and then the much-bigger Broadcom for $37 billion. The deal for Qualcomm would be $130 billion including debt.
Mr. Tan has for years pushed growth by acquisition. Underpinning the strategy is a recognition that the semiconductor business has largely matured. The rate of revolutionary change has slowed, and chip companies have focused more on price competition, leading to lower profit margins. His approach has been to gain scale by buying market leaders and then running those companies more efficiently — while also investing in technologies that customers like Apple want.
“Hock’s competitive advantage comes from understanding customer needs and market shifts in the chip space better than anyone in the world,” Kenneth Hao, a managing partner at Silver Lake who helped bring Mr. Tan to Avago, said in a statement.
But consolidation has led to concerns that the chip industry could become concentrated in the hands of just a few big players. Qualcomm itself is in the midst of acquiring NXP Semiconductor for $38.5 billion, while Broadcom is still awaiting national security approval for its $5.5 billion takeover of Brocade Communications.
Some analysts have wondered whether Broadcom, with Singapore as its legal headquarters, could face issues with the Committee on Foreign Investment in the United States, a government group that examines takeovers for threats to national security. But while a deal could face such a review, neither company believes that it would be the main obstacle to a transaction getting done, according to several people briefed on the bid. Broadcom’s operations are largely in the United States, and its legal base is in Singapore primarily because of that country’s low tax rate.
Antitrust approval may also be a concern. In January, the Federal Trade Commission brought charges against Qualcomm, accusing the company of abusing its monopoly in certain chips by charging unreasonable rates to partners like Apple, a company with which Qualcomm has a series of long-running legal fights. But Republican antitrust enforcers, picked by Mr. Trump, may take a more lenient approach to mergers.
The biggest issue may simply be that Qualcomm believes the current offer, worth about $70 a share, is too low. Qualcomm’s trove of patents — among the most formidable in the world of wireless networking — remains a hugely valuable asset. And the company could also believe that closing the NXP acquisition and reaching either a victory over or a settlement with Apple would lift its stock price.
But Qualcomm, the longtime leader in cellphone chip technology, has been grappling with a sagging stock price and investor wariness that the Apple fight will continue for some time.
On Monday, Qualcomm said that its board was weighing Broadcom’s offer.
Mr. Tan said in the interview that he believed that, should Broadcom succeed in buying Qualcomm, he could make peace with Apple.
But to win over Qualcomm, Broadcom may need to do something it hasn’t done before: wage a hostile takeover, including by replacing at least part of its quarry’s board. Although Mr. Tan professed a desire to reach a consensual deal, he suggested that he was prepared to take whatever steps necessary to win.
“We really know what our options are, and we haven’t really eliminated them,” he said.
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