If successful, the Broadcom attempt to buy and merge with Qualcomm would replace Dell/EMC as the largest tech merger ever.
So I thought it would be handy to compare the two merger attempts and talk about why one worked and the other one would face real challenges, in my opinion.
The problems involve several elements, but we’ll talk about three: common support, strong foundation and the unique power of a private company run by a founder.
As I went through this process, I not only realized that this attempt doesn’t make sense, I started to wonder if there was a very different agenda in place. Let me take you through my thought process to where I, and apparently many of my peer analysts, ended up when looking at this seeming train wreck.
Dell/EMC: I followed the Dell/EMC merger closely and know many of the executives on both sides. The triggers for this merger included two events at EMC: an attempt by “activist” investors to break the company up and take short-term profits, and an attempted acquisition by HP.
Led by Joe Tucci, the executive team had spent more than a decade building EMC into the top enterprise storage company in the world. While breaking the company up likely would have made them all money, in my view they realized their legacy was more important to them than the cash. They didn’t want to see the work they had done broken up.
If the company had broken up, it would have made what might have been the last years of many of their professional careers seem meaningless. But holding off activist investors had proven nearly impossible for other firms. That created a need to find a way to preserve what the executives had built.
In addition, they were approached by Meg Whitman and her team. That basically putting them in a dichotomy between two unenviable choices.
EMC needed a white knight.
Joe Tucci and Michael Dell were friends, and that friendship resulted in a joint plan to merge the firms. In this unique instance, EMC wanted Dell more than Dell likely wanted EMC. In addition, Michael Dell wanted his company to grow, and this merger got the combined company to a scale he felt he needed to assure Dell’s future.
Broadcom/Qualcomm: Qualcomm didn’t even see this merger attempt coming, and it doesn't want to be acquired, as evidenced by the Qualcomm board's rejection of the Broadcom proposal. In addition, Broadcom had indicated it would cut much of Qualcomm’s research budget, which is both core to Qualcomm’s culture and a major part of what makes the company function successfully. This would not have endeared Qualcomm’s management to Broadcom, and given that Broadcom had indicated it planned to do an integration merger, this would have put jobs on both sides at high risk. A hostile merger at any scale typically destroys much of the value of the acquired company, and these early indications suggest the outcome would be problematic.
Here I’m talking about the stability of the acquiring company. Dell had taken itself private in what appeared to be a near-impossible process. This created an unusually stable platform for the merger because private firms don’t have to worry as much about quarterly results and can more easily withstand the typical revenue and profit hits that often occur during a merger of any size. In addition, Dell uses a merger process that was developed at IBM and refined at Dell that uniquely protects the acquired asset.
Broadcom as it currently exists is the result of several high-speed acquisitions that don’t appear to have settled. It doesn’t enjoy Dell’s stability nor does it appear to have an acquisition process like Dell’s. It leans toward integration mergers, which, by their nature, tend to reduce the value of acquired assets significantly. Because of the speed of the acquisitions, the impact of this asset reduction likely has not been reflected in Broadcom's financials yet (adjustments often come years later as write downs), suggesting the Qualcomm merger might only kick the reporting of the related problems down the road but not eliminate them. This provides a poor foundation and process for a merger of this massive scale.
Given that mergers of this size are often catastrophic for one or both parties, this doesn’t bode well for this one.
Command and Control
Michael Dell is the founder of Dell and, as noted above, Dell is private. This puts a massive amount of control in Dell’s personal hands and assures he has the authority to execute massive projects. This is relatively unique and has only been shared by a few other CEOs like Bill Gates and Steve Jobs. EMC’s Joe Tucci, given his tenure and efforts at EMC, was close, but because EMC was public, he had nowhere near the power Dell had, which is why he needed Dell’s help in the first place. This goes to say that while Dell could acquire EMC, EMC acquiring Dell while public would have been far more problematic, even though it would have involved the same elements. Massive mergers have massively high degrees of difficultly, making authority at the top critical for pulling them off.
In Broadcom's case, CEO Hock Tan is a company aggregator by practice. He isn’t a founder, and he isn’t running a private firm. Even to attempt this merger showcases an unusual amount of control over a public company. However, recall that Carly Fiorina had similar control at HP, and her merger with Compaq eventually led to her own dismissal. In the end, she didn’t have the authority or internal support to protect her own job and, in covering the merger myself and meeting with many of the financial firms with positions in HP at that time, I discovered it was Compaq’s CEO Michael Capellas (who had a very unique skill set) that pulled it off. But the collateral damage to both firms wasn’t trivial. Tan doesn’t appear to have the massive command and control advantage that Dell has, and this significantly reduces the odds in what was already a very low chance of success effort.
Broadcom's Real Goals?
Large mergers tend to be very problematic. Anyone acquiring Qualcomm or EMC would have had massive difficulties preserving much of the value of the acquired firm.
Dell/EMC showcases a path that might be successful, but virtually none of the key elements that assured Dell/EMC’s success appear evident in Broadcom/Qualcomm. In addition, given the near-monopoly position the combined company would have, even getting this thing through regulatory approval would seem impossible given what is happening with the US government and the AT&T/Time Warner merger.
Broadcom doesn’t even appear to have Qualcomm management support. The Broadcom team isn’t inexperienced and would have to know this, suggesting there is something else in play here. It's possible this attempt isn’t serious but more of an attempt to knock Qualcomm off its stride. Large hostile mergers can do that, but Qualcomm is unusually heavy in attorneys, suggesting it could resist this attempt better than most.
I was with a group of peer analysts this week at a Qualcomm event, and speculation about the reason for the proposed takeover ran from Apple acting behind the scenes (Qualcomm and Apple are in litigation now), Broadcom attempting to create concerns about Qualcomm’s survival and steal accounts, and other possibilities.
All I can say for sure is that this merger appears so obviously impossible to consummate that buying Qualcomm seems unlikely to be the true goal of this effort.
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