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Would Broadcom acquiring Qualcomm bring more value to the Tech World?
I find myself thinking a lot about how all the pieces fit these days. Or rather, how to assemble them to arrive at the best outcomes. Whether you’re building a house, a company, or a life, it’s hard to be truly successful if the parts don’t fit, and if they don’t ultimately work well together to achieve a common purpose. Whether you’re talking about sports, relationships, innovation, politics, investments, or business, individual assets like talent, a great idea, skill, luck, timing, funding will only take you so far. You need a mix of them, and in the right proportions. You need to be able to bring them all together in the right way and at the right time.
How did Apple become so successful? In part, because Steve Jobs knew how to make all the right pieces fit at the right moment: dependable product innovation, stunning industrial design, near-flawless UX, outstanding marketing, a killer retail strategy, and an almost fanatical commitment to quality come to mind. Look at any successful company, and you will find a similar pattern: That ability to make all the pieces fit. At the pinnacle of their success, companies like BMW, Starbucks, Sony, Disney, HBO, and Amazon exhibit the same common trait.
For that trait to work its magic though, it has to extend throughout the organization. Product development has to gel with what the market will love. Marketing has to gel with sales. IT has to gel with everything and everyone. Customers have to gel with employees and their company cultures. Even partnerships have to be a good fit, from distributors and ad agencies to OEMs and supply chain partners. And then we come to mergers and acquisitions: There too, working on achieving the right fit at the right time is everything. Get that part wrong, and the result could be disastrous.
Welcome to the jungle
Innovation is the lifeblood of technology, and technology makes the world go round these days. So it stands to reason that in order to solve the big problems to build a better world, we have to get better at innovating, and to create environments that foster and protect innovation.
Mobility, cloud computing, edge computing, smart automation, AR/VR, smart spaces, autonomous vehicles, the IoT… they’re all basically part of one big complex ecosystem of invention and innovation, one where every layer is interconnected and interdependent.
The technology ecosystem we all live in and depend on now is like a big, lush, complex rainforest. It’s orderly yet chaotic, nurturing yet brutal, full of rules but also of violations… all at the same time. It’s filled with predators, prey, symbiotic relationships, frenemies, layered hierarchies, cycles, systems, accidents both good and bad… and it is evolving at a very healthy pace. It encompasses all of the savage beauty of nature but in a more human and business-focused setting, and so what happens in the wild teaches us important lessons that we can readily apply here.
Before examining how Broadcom and Qualcomm could fit together, it’s important to look at how each interacts with this ecosystem. Both have evolved successful approaches to thrive in this environment, yet their objectives and business models are vastly different. Those differences matter because the way everything fits together matters. How companies interact with every ecosystem they touch can tell us everything we need to know about where and how they fit (and equally important: where and how they don’t).
A tale of two titans
Avago, the company that acquired Broadcom in 2015 and took its name, has shown a consistent, meticulous, surgical approach to growth and success. Its path to growing revenue, margin, and scale has been driven mostly by acquisitions rather than what you might call organic growth. The model appears to be to buy dominant, industry-leading building blocks, and then carve out all of the parts that either aren’t #1 in their segment already, or probably won’t become #1 quickly after acquisition.
Outside of acquisitions, Avago’s basic formula is to aggressively find ways of cutting costs and drive operational efficiency to maximize margins. It isn’t my favorite business model, but I understand it, and Avago (now Broadcom) does this exceptionally well. If nothing else, the company is really good at providing short-horizon, consistent returns to investors.
That’s one thing.
The other is that because of this model, Broadcom doesn’t appear to be particularly focused on re-investing in the ecosystem. It’s important to be aware of this because cutting out a significant portion of the reinvestment in R&D that the ecosystem is accustomed to and putting an end to the sheer volume of proactive partnerships that Qualcomm is known for, would strike a blow to the tech industry’s innovation engine. Unlike Qualcomm, Broadcom tends to keep its focus narrow (on key products and a few large customers), and selectively invest in R&D in order to prioritize their most profitable products while simultaneously raising competitive barriers for everyone else in the ecosystem. The endgame is to achieve market-segment dominance by signing strategic, long-term, favorable deals with the largest customers in the space, while raising prices for everybody else. Wash, rinse, repeat. There is nothing inherently wrong with that, but it’s important to understand that, from an ecosystem standpoint, this creates a hoarding mechanism that consolidates access to premium IP near the top of the food chain, while simultaneously raising barriers of entry and slowing the pace of innovation for everyone else, including startups.
Qualcomm, on the other hand, takes a far more open and long-term approach to investments, innovation, and growth. Its culture is as opposite to Avago’s as it gets. Where Avago’s tendency is to discard parts of its business that aren’t already mature and immediately profitable, Qualcomm tends to put a lot of focus into planting seeds and solving big, difficult problems. Where Broadcom acquires already proven and profitable businesses, Qualcomm acquires and develops engineering talent and invests aggressively in 5-10 year transformative-technology bets. These are two very different models.
One of Qualcomm’s endgames, I think, is to drive both ROI and scale by not only sharing the technologies it develops and/or acquires for a fee, but also helping customers leverage that technology and further their use of it. The more partners and customers come to the table, the richer the ecosystem gets, and the more this fuels additional paths to innovation. The term you may be looking for right now is synergistic relationship: Qualcomm’s continuous reinvestment into the ecosystem drives the ecosystem’s growth, fuels innovation, and benefits Qualcomm in return. Although the ecosystem as a whole tends to benefit from this model (and consumers certainly do), Qualcomm has been so successful at monetizing and scaling it that it has attracted the attention of several anti-trust authorities globally. A few weeks ago, I touched on how that mechanism sometimes works, so feel free to circle back to that article later for some additional insight.
What sometimes gets missed about Qualcomm is that it also focuses on creating premium, industry-leading products, then creates tiered adoption roadmaps to access as much of the market as possible and achieve scale. Once those products and markets reach maturity, Qualcomm develops platforms which are eventually refined into what is usually referred to as reference designs. That depth-to-breadth product management cycle has the benefit of not only continually advancing innovation to create top-in-class products for Qualcomm customers, it also, in part due to its pace, efficiently lowers costs and time-to-market for all of the products it touches. That is a very different, strategy from Avago/Broadcom’s. Much more open, much more in sync with the ecosystem, much less risk-averse, more focused on transformative long term bets, and refreshingly conscious of the need to keep the price of IP and technology products reasonable.
So… why is Avago/Broadcom trying to acquire Qualcomm, and why now?
You may want to read this Forbes piece by Patrick Moorhead, President of Moor Insights & Strategy, and Daniel Newman, Principal at Futurum Research. It echoes many of my own views on the topic, and it’s a pretty good analysis of the situation.
If you’re in a hurry, here’s the short version: Broadcom made an unsolicited offer to buy Qualcomm for a little over $100 Billion. Emphasis on unsolicited. As far as I can tell, Qualcomm didn’t appear to have a for-sale sign up on its front lawn when the offer was made.
There is no reason Qualcomm would be looking to be acquired. Its model works. Its strategy looks solid. While it is weathering setbacks from regulatory actions and challenge of its model by Apple, the company is on very sound ground and appears to be picking up speed. Qualcomm’s patent portfolio and its contributions to standards are as fundamental to the global technology infrastructure as wheat is to bread. That isn’t the sort of thing anyone in their right minds would be eager to walk away from without both a very good reason and a reasonable degree of confidence that its next custodian wouldn’t just chop it all up for parts and destroy its legacy. For any such deal to fall within the realm of interesting possibilities, the price would have to be right and the buyer would have to be a good match.
Broadcom, meanwhile, is trying to close its acquisition of Brocade and may be looking to further grow revenues with a big acquisition. It is likely that it sees a timely opportunity to prioritize investments in key wireless (4G, 5G, Bluetooth) and computing assets that it can’t develop on its own (at least not at an acceptable cost). Qualcomm’s extremely-profitable licensing business with margins almost twice its own can’t hurt either. I say timely because it’s just about time to start reaping the rewards of Qualcomm’s 10-year investment in 5G technologies (without incurring the cost, obviously). I could be wrong, but the next logical move for Broadcom, following Avago’s traditional mode of operation, would be to restructure its brand new IP portfolio to suit its needs. Two possible outcomes jump at me right away, and they aren’t mutually exclusive: On the one hand, Broadcom could decide to roll up its licensing of non-SEP IP once existing contracts run out, in order to favor strategic partnerships with very large customers. On the other, Broadcom could hold on to Qualcomm’s existing model of open access, but raise its rates to further maximize profits.
Something else to think about: Qualcomm’s acquisition of NXP adds yet another layer of complexity to the equation. Broadcom has already signaled that it is interested in Qualcomm regardless of whether or not NXP is part of the package, but I doubt very much that European regulators would look kindly on the risk Broadcom/Avago’s business practices could pose to the future of one of Europe’s very few semiconductor success stories, especially if its aggressive cost-cutting and profit-maximizing tendencies might threaten to result in mass layoffs.
Speaking of regulators, I have one last point to make, and it isn’t a small one: An acquisition of Qualcomm by Broadcom would potentially create a quasi-untouchable wireless and networking juggernaut. This new company would basically enjoy control over the best 3G, 4G, 5G, RF, RFFE, ethernet, and switch technologies in the world. Circle back to the point I just made moments ago about the possibility of either rolling up Qualcomm’s non-SEP portfolio or raising rates, and you can see how Broadcom could be tempted to weaponize Qualcomm’s IP portfolio to restrict access to premium technology products, This would allow it to essentially put itself in a position to pick winners and losers to suit its needs. I expect that regulators might have some reservations about that eventuality.
With so much money on the table, why would Qualcomm not want to be acquired?
The short answer is that some companies are on a mission to be acquired, and some companies are on a mission to build something. You can usually tell which is which because they send very different kinds of signals. When I look at Qualcomm, I see a company behaving like it’s on a mission to build something. Besides, I think the unsolicited offer wasn’t really in line with Qualcomm’s potential. It sells the company’s value way short, in my opinion.
Case in point: Qualcomm’s latest quarterly earnings call barely a week ago didn’t indicate any move towards a sale. Quite the contrary. Qualcomm appears to be as laser-focused on its long-term strategy as ever. Here are a few key comments made by CEO Steve Mollenkopf during that call that I find particularly relevant:
“The team reported strong results in the product business, validating both our strategy and the strength of our product portfolio. We will maintain our strong commitment to and focus on technology and product leadership as we drive innovation into new opportunities and toward the path to 5G.”
“I am particularly pleased with the actions our teams have taken this year to advance the strategic objectives we set for the company. Almost 2 years ago, we set an ambitious target to significantly grow our serviceable available market by 2020. This past year saw substantial progress in the most critical new opportunities for the company.”
This is a company with a plan and a vision behind that plan, and both are intimately tied to its DNA. Qualcomm makes long bets because that’s how it builds value, drives innovation at scale, and subsequently ensures its own longevity. Put aside everything else you know or think you know about Qualcomm. If there were a Dao of Qualcomm, this would be one of its core precepts.
Looking more closely at what Qualcomm has been focusing on lately, it seems to have been quietly and methodically executing on its 2015 SRP (Strategic Realignment Plan). No suspicious changes. Nothing out of the ordinary. It has remained steady. And despite its ongoing dispute with Apple and an adjustment to its stock price pending resolution of that dispute (there should be some movement towards that end- 2018), Qualcomm is doing rather well: 6 quarters in a row of YoY growth in EBT and EBT margin expansion, QCT EBT dollars grew more than 50% YoY in 2017, and YoY QCT revenues outside smartphones (primarily IoT, automotive, networking) were up 25%… In addition, Qualcomm just signed three MoUs with Chinese OEMs (Xiaomi, Vivo, and OPPO Mobile) worth $12 Billion (the sort of massive deal that doesn’t just happen overnight.) And that doesn’t even take into account how important Qualcomm is to making the promise of 5G a reality. Qualcomm’s momentum feels real, organic, and in keeping with its usual approach. It has purpose to it. Getting acquired by anyone right now, let alone Broadcom, doesn’t seem to be part of the plan. I don’t think I am wrong about this.
So… is Broadcom even potentially a good match for Qualcomm?
I don’t see how it would be. And for me, that’s the biggest problem with this scenario. Remember how we started our discussion today? With a conversation about how important it is for all the pieces to fit in order for anything to work. Trying to combine Broadcom’s and Qualcomm’s models would be like trying to build a clock from two completely different sets of parts… one movement would be trying to turn the hands clockwise while another would be moving in the opposite direction. I just don’t see how that would work.
I look at Qualcomm’s behaviors and world view, and I look at Broadcom’s behaviors and world view, and I don’t see a match. At all. Broadcom would likely dismantle Qualcomm and try to retool the parts it wants to keep to fit in its world, but that would effectively destroy the very mechanisms that have made Qualcomm successful.
Don’t get me wrong: Broadcom is a solid company. It’s amazingly successful. It has a habit of hitting its targets, enjoying high operating margins, it knows how to build value for investors, it is growing, it has a solid presence in the silicon business, and it is focusing on many of the right things. On paper, the combined wireless (and to a lesser extent) computing assets would create an unassailable semiconductor company that even Intel and Samsung should fear, but Broadcom’s approach to R&D would cause many of its parts to atrophy over time.
Even if we were to gloss over other, more obvious obstacles that would get in the way of an acquisition like this actually moving forward (like debt and regulatory hurdles), these two companies’ cultures are so radically different that I just don’t see how that marriage would work. Based on what I’ve seen, Broadcom (Avago) is much more focused on short bets than long ones. Taking risks and being patient with innovation aren’t really part of that model, as far as I can tell.