Broadcom’s bid For Qualcomm Could Reconfigure The Chip Industry

If the acquisition is successful, the combined company could become one of the biggest international suppliers of mobile-phone chips in an incredibly lucrative market

In what could become the biggest ever acquisition in the history of tech, chip-making behemoth Broadcom made a 130 billion dollar bid to acquire its’ competitor Qualcomm on Monday, thus setting the stage for a takeover battle that could reconfigure the industry at the heart of mobile chip technology. The news has led to a rise of 3.7% in Qualcomm shares in pre-market trade and an appreciation of 1.1% in Broadcom stock.

What’s more, the Bloomberg report propelled Qualcomm shares up as much as 19% last Friday, the biggest one-day move since October 2008 and made it the best performing stock on the S&P 500 index on Friday. The stock crushed its average daily volume figure as it exchanged about 81 million shares in hand compared with 9.2 million shares on average. Meanwhile, Broadcom shares rose about 5.5% on the day on elevated volumes of 12 million compared with the 2.8 million average.

Chip Industry market share recorded for full year 2016. Source: Business Insider

Chip Industry market share recorded for the full year 2016. Source: Business Insider

The deal is currently sending investors into a flurry, as the combined company could claw back market-share from leaders and rivals, Intel and Samsung Electronics. Broadcom has made a name for itself over the past few years by developing WiFi chips on behalf of phone manufacturers, amongst other endeavours. On the other hand, Qualcomm’s business revolves mainly around supplying mobile phone makers with high-end modem chips that perform the important function of connecting handsets to wireless data networks such as 4G. If the merger goes ahead, the combined enterprise would have control over modems, Wifi, GPS and near-field communications chips, which could bestow the new company with the bargaining power to raise prices for high-end vendors, such as Apple and Samsung.

The acquisition would be an incredibly important development in the tech sector, and investors on both sides seem positive about the deal. This is because, on one hand, the acquisition would allow Qualcomm stock to bounce back from a rather lacklustre year on the market. That is, before news of the deal with Broadcom broke, Qualcomm’s shares were down 16% for the year, despite the fact that chipmakers have climbed 40% on average over the same period. In part, the company’s troubles stem from a legal dispute over pricing with Apple, forcing the company to issue a profit warning earlier in 2017.

As such, tech investors will certainly be keeping a very close eye on any new developments regarding the biggest acquisition in the history of the sector. Nevertheless, any deal struck between the two companies is likely to face intense regulatory scrutiny, so, unfortunately, it is unlikely that the outcome of the acquisition will be made clear anytime soon.

 

(By Kathleen Craig, Research)

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