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After Losing Qualcomm, What Does Broadcom's Hock Tan Do Now?

While Tan may take a moment to consider how best to use his capital, acquisitions likely run too deeply in his DNA to give up on looking for targets.

By Chris Nolter Mar 15, 2018 7:12 AM EDT

Following President Trump's order to block Broadcom Ltd.'s (AVGO) hostile bid for Qualcomm Inc. (QCOM) , CEO Hock Tan may take some time for soul searching about its aggressive acquisition strategy and use of capital.

"It was a gut punch," GBH Insights analyst Dan Ives said of Trump's order, suggesting that Tan could have "put a potential fortress around 5G technology" if his bid for Qualcomm succeeded.

"It is a step back for them," Ives said. "It does take them back to the drawing board."

Tan and Action Alerts Plus holding Broadcom had done significant work to pull off the deal. The acquisitive chipmaker lined up $100 billion from a dozen banks and a private equity consortium including Silver Lake LP, KKR & Co. (KKR) and CVC Capital Partners Ltd to fund the deal. It also filed to change its domicile from Singapore to the U.S., which the company still expects to complete by April 3.

Shares of Broadcom edged down about 0.3% on Wednesday to $262.84. The stock is below its level of $275 per share before Tan launched his hostile bid for Qualcomm in November.

Still, Tan and Broadcom remain in a position of strength. Over the last five years, which saw Tan acquire LSI Corp. for $6.6 billion, namesake Broadcom for $37 billion and Brocade Communications Inc. for $5.9 billion, Broadcom stock is up nearly 670%.

Ives suggested the company might review its approach to capital in the wake of the failed deal. "Do they look more to capital returns to shareholders or do they continue to go down this path?" the analyst asked.

Broadcom currently spends about half of its free cash flow on dividends and half on acquisitions, Cowen and Co. analyst Karl Ackerman noted in a recent report. If the company maintained spending on its dividend but diverted 30% of free cash flow to buybacks and 20% to paying down debt, it could boost earnings by a dollar per share annually. The earnings bump could help fuel Broadcom's stock.

In one sense, Trump did Broadcom a favor by preventing Tan from reaching a deal with Qualcomm -- which was a long shot to be consummated.

Tan had offered Qualcomm an $8 billion termination fee in the event that regulators quashed the deal. Not only would Broadcom have lost out on Qualcomm if it had executed a deal only to have regulators reject it, but the company would have been without $8 billion that it could have returned to investors or spent to acquire another company.

And just because Trump and Cfius rejected Broadcom's purchase of Qualcomm does not mean that Broadcom will be unable to acquire other U.S. semiconductor companies, Chris Brewster of Stroock & Stroock & Lavan LLP's national security and Cfius group said.

"Cfius has always maintained a focus on the deal in front if it," Brewster said, noting that "it is very much focused on individual transactions on a case-by-case basis." Qualcomm holds security clearances and has a range of contracts with the U.S. government that make it especially sensitive, Brewster said.

Less sensitive companies such as Xilinx Inc. (XLNX) , which has a $1.94 billion market cap, or Mellanox Technologies Ltd. (MLNX) , with a $3.8 billion valuation, could be targets, GBH's Ives suggested.

"For Broadcom and Tan, their DNA is not to back down," he said. "They are going to continue on the M&A warpath."

https://www.thestreet.com/story/14523154/1/what-does-broadcom-ceo-hock-tan-do-now.html