Shortly after the second offer was made, Qualcomm responded, "Broadcom proposal materially undervalues Qualcomm and falls well short of the firm regulatory commitment the Board would demand given the significant downside risk of a failed transaction."
It appears that Qualcomm is now having second thoughts about the total rejection and is warming up to additional talks with Broadcom. The two companies had a face-to-face on February 23rd to discuss a possible deal, and the talks seem to have gone well. According to Qualcomm, "the meeting led to further progress toward a possible negotiated transaction on key issues other than price."
The main sticking points seem to surround pricing, with Qualcomm asserting that both of Broadcom's previous offers of $79 per share and $82 per share materially undervalues the company. On the pricing front, Qualcomm feels that it is uniquely positioned in the emerging 5G movement and that its impending acquisition of NXP should be taken into account with any future negotiations.
Qualcomm has a firm grip on LTE modem market share for the smartphone market, and there are no signs that that position will diminish in the coming years with 5G modems (although Intel is looking to make a strong push in the sector). In addition, Qualcomm also has an enviable position as a supplier of SoCs for the majority of Android smartphones on the market with its Snapdragon family of products. There is also Qualcomm's huge war chests of patents to consider.
Qualcomm Chairman Paul E. Jacobs sent a letter to Broadcom's Hock Tan outlining what Qualcomm wants to get out of any potential transaction. At the forefront, Jacobs encourages Broadcom to enter into an NDA and address concerns over regulatory approval. To that end, Qualcomm is promoting a termination fee of 9 percent of enterprise value that would be payable if the transaction is "terminated other than due to a breach of the agreement by Qualcomm or our failure to obtain stockholder approval."
Qualcomm is also asking for greater transparency with regards to how it will be able to conduct its licensing business during the murky period between agreeing to a deal and the final closing of the transaction. "You still declined to disclose any information regarding your plans to change how the licensing business would be structured and operated after closing, based on your belief that such disclosure is not permissible under antitrust law," writes Jacobs.
"We do not believe that is the case and we have heard from stockholders, research analysts and customers that you have briefed them on your plans at a high level. We continue to believe that we need visibility into those plans beyond what we are hearing in order to fully assess the antitrust risks and value implications of a transaction with Broadcom."
Qualcomm stock has been underperforming relatively to its rivals for years, which explains why Broadcom sees a buying opportunity in the first place. But the realities of hard disagreements over the transaction price and the potential for regulators to scuttle the deal a real concern. Parnassus Investments' chief Jerry Dodson, whose firm holds 8.3 million Qualcomm shares, told the LA Times that he feels the deal has a 50 percent chance of surviving if approved by shareholders.