Qualcomm v Broadcom – The Value of IP Assets
The media has been scattered recently with reports surrounding the unsolicited bid of $103 billion for Qualcomm Inc, made by Broadcom Ltd. The companies are competitors in the mobile device chipmaking industry; manufacturing and supplying these components to international computer and telecommunication companies. There is substantial scrutiny around the prospective takeover as, should the offer be accepted, it would be the biggest tech M&A deal ever. Adding to the complexity of the deal, – Qualcomm is simultaneously seeking approval for the purchase of Netherlands-based NXP, a semiconductor manufacturer.
Qualcomm and Broadcom each own thousands of patents for these chips which make up a large portion of the value of each company, however, they have also brought with them legal battles surrounding the use and licensing of these patents. Since January 2017, Qualcomm has been involved in a head-to-head lawsuit with Apple Inc, one of its largest customers. Apple Inc first alleged fraudulent royalty charges against Qualcomm, on the basis that the law requires patents to be licensed out on fair, reasonable, and non-discriminatory (or “FRAND”) terms. Qualcomm then hit back in July with a lawsuit against Apple Inc for alleged patent infringement. These corporate lawsuits caused uncertainty for Qualcomm and share price fluctuations, Qualcomm’s shares plummeted 18% in January 2017. It has continued to affect the company since.
Commenting to the World Intellectual Property Review (WIPR), our Intellectual Property Partner, Jonathan Abrams, explained that “there has been a threat by Apple to remove the business from future iOS handsets and pass that on to Intel, as it has a better working relationship.”
When the news of Broadcom’s opportunistic hostile $103 billion bid to takeover Qualcomm Inc reached the media, it caused Qualcomm’s share price to increase 19% to around $62 per share. The bid is rumoured to be rejected as the board at Qualcomm believe the bid undervalues the company. However, the benefits are that Broadcom’s recognised cohesive relationship with Apple Inc is likely to resolve the litigation issues more easily than Qualcomm seems capable of doing, meaning they can maintain a strong relationship with the leading consumer electronics manufacturer. On top of this, Broadcom could reportedly increase yearly revenue to a predicted $51 billion if the companies combine.
Jonathan further added in the WIPR, “That threat is on the horizon for Qualcomm, and the Broadcom offer, from their point of view, and the point of view as company with an existing relationship with Apple, makes a lot of sense. Even purely from a relationship perspective.”
Although some electronics companies, including Apple Inc and Samsung Electronics Co, have started to manufacture chips in-house, these electronics companies still at present rely heavily on outsiders. The size of the deal may cause a problem in regards to regulatory approval, however, if Broadcom can take over Qualcomm and settle its lasting dispute with Apple Inc, the companies combined, as well as NXP, would create a concentrated supply chain for semiconductor components and would subsequently become one of the world’s largest chip makers – the chip making industry is expanding and these three companies have overlapping plans far beyond just supplying smartphone components. This battle is far from over and highlights the value of intellectual property, and in particular patents, when it comes to company valuations.