When Broadcom proposed ousting Qualcomm's board of directors on Dec. 4, it set in motion a high stakes chess match for control of San Diego's most iconic technology company.
The outcome could reverberate not only locally but throughout the tech industry -- possibly changing the landscape for firms ranging from Apple to Google, Microsoft to Intel.
Qualcomm invented technologies that manage cellular communications in every smartphone. Rival Broadcom's hostile takeover bid -- launched after Qualcomm's board rejected its $70 per share offer in November -- looks like it will play out relatively quickly.
Qualcomm's shareholders will vote on either Broadcom's nominees or Qualcomm's slate of candidates by the company's March 6 annual meeting.
Strategies in this fight remain unclear. Both companies are being cagey about potential moves.
But analysts say Broadcom has the ammunition to raise its price for Qualcomm -- perhaps as high as $100 per share -- and still come out with a deal that contributes to earnings.
If Qualcomm's board hopes to fend off Broadcom, analysts believe it must wrap up its slippery acquisition of automotive/Internet of Things chip maker NXP Semiconductors, which would make Qualcomm less dependent on smartphones.
It also may need to consider new ways to mend its troubled patent licensing division and raise the specter of stiff regulatory resistance to a Broadcom/Qualcomm marriage.
All that, plus tout its leadership in the massive market opportunity from new, ultra-fast 5G mobile networks, where Qualcomm has been investing in core technology for nearly a decade.
"We are probably the best positioned company for 5G and the connected world," said Chief Executive Steve Mollenkopf at a recent Economic Club of Washington, D.C., event. "We are sitting in a momentary spot where our revenue is a little bit difficult to model because of these licensing disputes. But those will get resolved, and what you'll see is a company that really is providing the fundamental technology....into the connected world when the connected world is disrupting almost every industry."
Even that might not be enough, however. Qualcomm's ongoing legal battles with Apple and antitrust regulators over patent fees have weighed down its stock price.
Qualcomm's shares slumped 18 percent this year before rallying last month on news of Broadcom's $103 billion buyout bid.
Meanwhile, Broadcom's shares have soared nearly 60 percent this year. Chief Executive Hock Tan continues to deliver strong financial results. Revenue surged 33 percent for fiscal 2017. The company increased its dividend 72 percent.
"I am sure investors in Qualcomm -- particularly as the semiconductor space has run up pretty significantly this year outside of Qualcomm -- have gotten a little fatigued holding onto these shares that have under-performed," said Abhinav Davuluri, an analyst with Morningstar.
"My guess is a lot of shareholders would think long and hard about taking it if you waved $80 (per share) under their nose," added Bernstein Research Analyst Stacy Rasgon. "I think Qualcomm management has their work cut out for them."
Closing the Deal with NXP
Qualcomm's shares last traded above $80 three years ago. To get there again, analysts say the company needs to complete its $38 billion acquisition of Dutch automotive and Internet of Things chipmaker NXP Semiconductors.
The NXP buyout has yet to receive regulatory clearance in Europe, China and South Korea. Qualcomm expects to nail down approvals early next year.
Last week, activist NXP shareholder Elliott Partners began publicly lobbying fellow shareholders for a higher price from Qualcomm.
Elliott pegs NXP's value at $135 per share -- 23 percent higher than Qualcomm's $110 per share price.
Qualcomm stood by the current offer. But 80 percent of NXP shareholders must agree to sell their shares to Qualcomm for the deal to go through. To date only 2 percent have done so.
Broadcom says its buyout offer for Qualcomm stands whether the NXP deal closes at $110 per share or not.
But Broadcom hasn't said what it would do if Qualcomm agrees to pay more for NXP.
Analysts don't expect Broadcom to walk away though. Tan could boost his offer for Qualcomm on the condition that it jettison NXP, whose inclusion increases Broadcom's debt load and regulatory risk over potential job cuts. NXP employs 31,000 workers globally. Broadcom has approximately 17,000 employees.
"The real motivation for Broadcom, where they are weakest, is in connectivity -- the 4G and 5G part as we transition to the next generation," said Geoff Blaber, an analyst with CCS Insights. "That is a substantial gap in their portfolio, particularly as it relates to the Internet of Things and powering a huge multitude of devices. It is an element that they absolutely have got to have."
Getting Out of Licensing Limbo
Tan hasn't said precisely what he has in mind to end patent lawsuits with antitrust regulators and Apple, a long-time Broadcom customer. But analysts believe his plans involve slashing royalty rates and making up for any lost revenue by entering long-term chip supply agreements with top smartphone makers and cutting costs.
Qualcomm has argued that these legal disputes will be settled in time, so drastic changes aren't necessary.
"The stock was $81 not too long ago before all these things hit, so if they could just settle Apple, the stock might be in the $80s again on its own merit," said Mike Walkley, an analyst with Canaccord Genuity.
But Walkley added that the Apple/Qualcomm feud is so entrenched "that I don't think Apple is going to help them by settling while Broadcom is trying to buy them. My gut tells me Apple would be pleased if Broadcom bought Qualcomm."
One step Qualcomm might consider is splitting its licensing division and chip-design arm into separate companies, said Steven Re, of Fairbanks Capital Management in Rancho Santa Fe.
"The only way Qualcomm can sustain a better stock price than what Hock Tan would offer is to split the company intelligently," said Re. "It makes a lot of sense after they close NXP. I don't think they have a choice, or they're not to get the stock price high enough to save their bacon."
Re believes a split derails the core charge that Apple and regulators levy against Qualcomm -- that it illegally leverages its market dominance in cellular modems to extract exorbitant patent royalties from smartphone makers, who don't fight back for fear of losing chips supply.
While Qualcomm has studied splitting the company several times -- most recently in 2015 at the behest of activist investor Jana Partners -- its board has rejected the idea on the grounds that both divisions rely on each other.
Drawing the Battle Lines
Last week, Qualcomm rolled out new technologies that deliver "Always Connected" Windows 10 laptops with 20-plus hours of battery life.
It unveiled the latest Snapdragon 845 processor that will power better artificial intelligence, locked-down security and depth-sensing cameras for face/iris scanning ID -- enabling smartphones from Samsung, Xiaomi, LG and others to keep pace with Apple's iPhones.
Qualcomm's long-held position as the R & D engine for the mobile industry -- particularly for Android and Chinese device makers -- is a subplot in this hostile takeover saga. But it may be starting to gain more attention.
While Broadcom contends Qualcomm's customers favor the combination, CNBC reported last week that both Google and Microsoft have raised concerns about a potential merger.
The two tech giants are supposedly wary of Apple's influence over the deal and worried about Broadcom's reputation for cutting costs rather than investing in new technologies, which could interfere with Qualcomm's 5G research.
In a research note, Rasgon said Qualcomm's 5G efforts would be "mostly safe" from cuts under Broadcom because it's a core franchise that the company needs.
But Qualcomm's work on long-battery life chips for laptops, as well as its new Centriq server chips targeting data center computers, would likely be on the chopping block, said Rasgon.
Google is reportedly interested in power efficient server platforms for data centers. Microsoft has already adopted Qualcomm's Centriq platform for certain products -- on top of working with Qualcomm to tune its smartphone processors to handle Windows 10.
"The article suggested that the complaints were directed toward Qualcomm rather than the regulators (we shall see what happens going forward,)" wrote Rasgon. "But it appears initial battle lines may be beginning to be drawn between Microsoft/Google and Apple as these tech behemoths jockey for position in a changing landscape."