Qualcomm fired back against Broadcom's $103 billion hostile takeover bid on Tuesday, painting its most comprehensive picture to date as to why shareholders should vote to keep the San Diego wireless technology giant independent.
In a letter and video message to shareholders, Qualcomm laid out 2019 revenue and earnings growth targets that the company says "delivers far more value" than Broadcom's current $70 per share offer.
To ensure it hits its financial projections, Qualcomm unveiled a new $1 billion cost-cutting plan.
According to Qualcomm, Broadcom's offer ignores the growth potential from ultra-fast 5G networks, which are expected to begin rolling out next year. Qualcomm claims to have a one-year to two-year lead over competitors in 5G technology.
And the company again asserted a takeover -- the largest ever in the semiconductor industry -- would face major anti-trust hurdles and could be blocked by global regulators.
"It is clear that this undervalued, risky proposal makes no sense for a Qualcomm stockholder," said Chief Executive Steve Mollenkopf. "It is not in the right zip code on value."
The two companies are entwined in a proxy battle for control of Qualcomm's board of directors following its rejection of Broadcom's buyout offer in November.
Broadcom has nominated 11 alternative candidates to replace Qualcomm's entire board. Several of Broadcom's nominees have ties to private equity firm Silver Lake Partners -- a long time backer of Broadcom Chief Executive Hock Tan in his efforts to grow Broadcom, formerly Avago Technologies, through acquisitions.
Shareholders will vote for either Qualcomm's nominees or Broadcom's alternative candidates by Qualcomm's March 6 annual shareholder meeting.
The deal would create a semiconductor Goliath rivaling Intel and Samsung. It would have leading market position in nearly all high-value chips used in smartphones.
In a statement, Broadcom blasted Qualcomm for refusing to engage in takeover talks.
"Qualcomm management has repeatedly over-promised and under-delivered since the announcement of its strategic realignment plan in 2015, resulting in an inability to meet financial targets as well as deteriorating profitability and destruction of shareholder value," said Broadcom, based in Singapore and San Jose.
Qualcomm's share price significantly lagged its semiconductor peers last year because of the ongoing, nasty legal battle with Apple and anti-trust regulars over the San Diego company's patent licensing business practices.
Apple has stopped paying patent royalties to Qualcomm during the dispute -- costing the company more than $2 billion a year in revenue.
While the legal process takes time, Qualcomm argues that the spats with Apple and regulators are temporary. They will be settled either in or out of court -- possibly before a Broadcom takeover could clear regulatory review.
"We have a number of important legal milestones later this year and in early 2019 which could be very helpful in resolving our dispute with Apple," said Mollenkopf.
Qualcomm outlined a game plan to deliver adjusted earnings per share of $6.75 to $7.50 by its 2019 fiscal year -- up from $4.28 per share in adjusted earnings in 2017.
The growth stems from cellular technologies pushing their way into adjacent industries beyond smartphones -- such as connected cars and the Internet of Things.
Qualcomm pulled in $3 billion in non-smartphone revenue last year -- up 75 percent from two years ago. The company claims wireless technology's expansion into new industries boosts its market opportunities from $23 billion in 2015 to $150 billion in 2020.
Tim Long, an analyst with BMO Capital, said some of Qualcomm's projections "seem aggressive, but the company is initiating a new cost savings plan while these adjacencies are ramping (up). We are encouraged by management's more aggressive stance....We would like to see the company align operating expenses with revenues on a more regular basis, rather than when pressured externally."
The company said its $1 billion in cost reductions would be focused on sales and administration overhead and restructuring its patent licensing business -- as well as the wind-down of pre-commercial 5G research spending as the technology comes to market.
A Qualcomm spokeswoman said no further details, including whether the cost cutting will result in layoffs, were available.
Based on its 2019 projections, Qualcomm contends Broadcom's $70 per-share offer values the company at 10 times adjusted earnings per share.
A stock index of Qualcomm's semiconductor peers currently trades at 19 times projected earnings, and recent mergers have valued companies at 22 times earnings.
"During the 3G to 4G transition, Qualcomm revenues more than doubled from $11 billion in fiscal 2010 to $25 billion in fiscal 2013," said President Cristiano Amon. "The 5G opportunity is substantially larger than 4G and so is the upside for Qualcomm."
While Broadcom says mutual customers support the merger, Chinese phone makers Oppo, Vivo and Xiaomi have expressed concerns that the deal could lead to higher chip prices, according to Qualcomm. There also have been reports that some U.S. tech giants don't favor a merger.
"We are the primary chip supplier to China, which is growing faster than Apple," said Mollenkopf. "We are a leader in the high-end Android space, helping to drive the substantial growth of our partner Google. And Microsoft has been a great partner."
Qualcomm's shares gained $2.87, or 4 percent, on Tuesday to close at $68.25 on the Nasdaq exchange.