March 5, 2018
Broadcom Ltd.'s proposed $8 billion breakup fee if its purchase of Qualcomm Inc. is rejected by regulators is unusually big compared to other recent deals, a Bloomberg Law analysis shows.
But antitrust lawyers told Bloomberg Law that the size of the fee makes sense for a complex merger.
The breakup fee, called a reverse regulatory termination fee, appears in merger agreements between companies that anticipate friction in getting the deal past antitrust or other regulatory authorities. A Broadcom-Qualcomm tie-up would need to clear multiple competition authorities, including major ones in the EU, China, and the U.S.
In such circumstances, the buyer agrees to compensate the target company for its trouble if regulators block the deal. The buyer generally also takes the driver’s seat in negotiating with regulators.
The $8 billion that Broadcom is offering to Qualcomm if they ink a deal that’s ultimately rejected by regulators is 6.8 percent of the current $117 billion offer. “Broadcom is a very sophisticated company, and it’s trying to woo a very sophisticated company. That’s probably the appropriate fee to get the deal done,” David Balto, a former FTC policy director, told Bloomberg Law.
Qualcomm has countered with its own request for 9 percent of the total value of the company, which amounts to roughly $7.4 billion at current market prices but could go higher. Qualcomm also wants that payout if the deal fails for any reason. Broadcom’s is only available if regulators block it.
A person close to the deal told Bloomberg Law that Qualcomm prefers a breakup payout based on the company’s value because it wouldn’t be based on the theoretical cost of an unconsummated sale.
Either figure is high in comparison to other deals, Bloomberg Law’s analysis shows. In the past year, only four merger agreements out of the 23 formally announced mega-deals ($10 billion or more) included regulatory termination fees — CVS Health Corp.'s $68.7 billion merger with Aetna Inc., Dominion Energy Inc.'s $14.5 billion merger with Scana Corp., Dynegy Inc.'s $10.5 billion merger with Vistra Energy, and 21st Century Fox Inc.'s $65.9 billion merger with Walt Disney Co.
The size of those breakup fees relative to the deal value ranges from just under 1 percent, in Vistra-Dynegy’s case, to just under 4 percent, in Fox-Disney’s case.
Since 2016, regulatory termination fees showed up in around 15 to 20 percent of deals over $5 billion, Bloomberg Law’s analysis found. The average percent of deal value was about 4 percent, and the dollar figures were much lower. For example, the breakup fee for Dominion Resources Inc.'s acquisition of Questar Corp. was $154 million, 2.6 percent of the $5.97 billion deal value.
Broadcom’s offered breakup fee puts the deal into a rare pantheon of risky ventures. AT&T Inc. had to pay $3 billion to Deutsche Telekom AG in 2011 when regulators blocked its purchase of T-Mobile USA Inc. That payment was 7.7 percent of the $39 billion deal.
Google Inc.'s acquisition of Motorola Mobility Holdings, Inc. in 2011 included a whopping 25 percent breakup fee of $2.5 billion in case of regulatory failure. That deal cleared regulators and closed in 2012.
Anthem Inc. and Cigna Corp. are disputing Cigna’s entitlement to a $1.85 billion regulatory termination fee on their failed merger, which was blocked by a judge in February 2017. That fee is closer to the norm, representing 3.85 percent of the $48 billion deal.
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