Qualcomm Sees Risks at Every Turn in Broadcom Deal

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By Eleanor Tyler

Qualcomm Inc. and hostile suitor Broadcom Ltd. are squaring off over fees meant to buffer the risk of a long, drawn-out regulatory review and the threat that regulators will kill the deal.

The dickering, ahead of a March 6 shareholder meeting that may decide the future of the transaction, highlights the regulatory hurdles the two sides anticipate if the deal goes forward. Broadcom has expressed confidence it can get the combination through multiple regulators in a year. Qualcomm has said the proposed merger faces substantial risks of failure.

Qualcomm wants a breakup fee of 9 percent of Qualcomm’s total value, also called “enterprise value,” if the deal fails for almost any reason. That payout would be at about $7.3 billion under current market values, but it could go higher.

Broadcom has offered a flat $8 billion breakup fee, payable only if regulators block the deal.

Broadcom has also offered Qualcomm a “ticking fee” if regulatory review drags on for more than a year. If the sale takes longer to complete, Broadcom has proposed an extra payment that would start accruing on the anniversary of the merger announcement. But Qualcomm would only be entitled to the ticking fee if the deal closes, which makes it less attractive in terms of moderating regulatory risk, according to a person close to the deal.

Qualcomm’s requests to Broadcom represent “a fair middle ground on antitrust that provides substantial protection for Qualcomm’s shareholders,” Scott Sher, a Washington-based partner at Wilson Sonsini Goodrich & Rosati who represents Qualcomm, told Bloomberg Law.

“Broadcom would make certain divestitures and agree to behavioral remedies as required by regulatory authorities,” he said. “The 9 percent break fee is also consistent with recent merger agreements where the transaction presented significant antitrust issues.”

Broadcom encouraged Qualcomm’s shareholders March 1 to vote by March 6 for six proposed directors that would press for the Broadcom deal. Qualcomm opposes those directors in that proxy battle.

“Qualcomm stockholders deserve directors who are willing to genuinely consider all paths to maximizing stockholder value, including by sincerely engaging with Broadcom to negotiate a transaction,” Qualcomm said in its note to shareholders.

Divergent Views

Qualcomm and Broadcom have proposed different methods of calculating the breakup fee, even though the payout amounts are roughly the same. Qualcomm’s math would yield about $7.3 billion. Broadcom’s proposed $8 billion is about 7 percent of its current offer for Qualcomm, $117 billion.

The difference shows divergent views from the parties. From Qualcomm’s perspective, if the sale never closes, Broadcom’s “deal price” of $117 billion never materializes. It makes more sense under that scenario to calculate the breakup fee as a percentage of Qualcomm’s value going into the deal rather than a merger price that didn’t pan out.

Qualcomm used Halliburton Co.'s failed attempt to buy rival oil industry services provider Baker Hughes Inc. as a model of comparable risk, the person close to the deal told Bloomberg Law. The two oil services companies inked their merger agreement in late 2014 and had to abandon it in May 2016, when the Justice Department challenged it as anticompetitive.

Halliburton’s $3.5 billion breakup fee was one of the biggest ever paid out, weighing in at 10 percent of the deal’s proposed $35 billion value. The fee had been calculated on enterprise value, not deal value, the person said.

Remedies

Regulatory breakup fees are intended to discipline a buyer for fighting regulatory resistance by increasing the cost of failure, but Qualcomm is also demanding answers from Broadcom about what it would give up to secure clearance from regulators.

Overlapping markets between the two companies include radio frequency modules and chips used in mobile and network Wi-Fi connections. Those overlaps could easily be addressed with divestitures, analysts said.

However, there is also substantial overlap in research and development, with Qualcomm stepping into markets in which Broadcom competes. The European Commission has required large R&D divestitures in other big mergers like DowDuPont Inc. and has announced a focus on preserving competition in innovation more broadly.

Broadcom has said it will divest any overlapping lines of business that regulators demand from Qualcomm’s line of products. Qualcomm wants Broadcom to agree to divest its own assets where appropriate.

Qualcomm is also asking Broadcom to pledge that it would agree to “behavioral” remedies, such as interoperability pledges, that regulators might impose on the deal.

Justice Department antitrust chief Makan Delrahim has said repeatedly that he isn’t a fan of such remedies. But practitioners told Bloomberg Law that other major authorities that are expected to review the Broadcom-Qualcomm deal — the EU and China, specifically — often demand extensive behavioral agreements from merging parties.

To contact the reporter on this story: Eleanor Tyler in Washington at etyler@bloomberglaw.com

To contact the editor responsible for this story: Fawn Johnson at fjohnson@bloomberglaw.com

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