Why Intel Is So Wary of a Broadcom-Qualcomm Merger

The Wall Street Journal

Deal would create combine two areas—phone chips and data centers—Intel has targeted for growth

The revelation that Intel Corp. INTC -2.05% is considering buying Broadcom Ltd.AVGO +2.63% , a company valued at more than $100 billion, shows the depth to which the chip giant feels threatened by a potential tie-up between Broadcom and its rival QualcommInc. QCOM -0.71%
Since late last year, Intel has been exploring a bid for Broadcom to forestall that company’s $117 billion offer for Qualcomm in what would be the biggest-ever tech deal, people familiar with the matter told The Wall Street Journal in an article published Friday. Intel’s interest in derailing that deal reflects its worry that a combined Broadcom-Qualcomm, which would create the third-largest chip company by revenue after Intel and Samsung Electronics Co., would endanger its competitive position, the people said.
A merged Broadcom and Qualcomm would combine market-leading smartphone chips with a strong presence in data centers, two areas Intel has targeted for growth. And Qualcomm’s own proposed purchase of Dutch automotive chip specialist NXP Semiconductors NV would turbocharge such a merger in the automotive market, where Intel has placed one of its biggest bets.
“You’d have this powerhouse going up against you,” said analyst Stacy Rasgon of Bernstein Research, noting the combined revenue of Broadcom and Qualcomm—nearly $40 billion in fiscal 2017—would be formidable even relative to Intel’s $63 billion in the same year. Nonetheless, he finds an Intel-Broadcom merger unlikely.
There are several reasons why such a combination may not happen. Intel is weighing a range of alternative acquisitions, the Journal reported Friday, and a hostile Broadcom offer would present enormous challenges of financing, complexity and regulatory scrutiny.
Intel has made relatively few big deals in its 49-year history—the largest was in 2015 when it acquired Altera Corp. for $16.7 billion—and it has previously had a spotty track record of folding them in.
Intel in a statement said its focus is on integrating its recent purchases and “making them successful for our customers and shareholders.” The company declined to comment further.
An Intel-Broadcom tie-up may not even make sense in terms of strengthening Intel, according to some analysts. “I don’t think there’s any benefit to Intel,” said Handel Jones, a consultant at International Business Strategies. In particular, he said, Broadcom’s products wouldn’t mesh well with Intel’s manufacturing operations, where the chip giant could use additional volume to reduce costs.
But the prospect that Intel could bid for Broadcom reflects tectonic forces reshaping the semiconductor industry as chips make their way into all manner of consumer and industrial products, from smart speakers to urban infrastructure.
Intel, with a market capitalization of about $243 billion, holds over a 90% share in its core markets of processor chips in personal computers and data-center servers, according to Mercury Research, leaving it scant room to grow in those areas as PC shipments continue their persistent decline.
Intel has responded, in part, by moving aggressively into cellular communications chips, where it has replaced Qualcomm units in a portion of Apple Inc.’s iPhones and made inroads with the next-generation 5G cellular specification.
It has advanced into the automotive industry with its $15.3 billion purchase of Mobileye NV, a leader in sensors for assisted-driving features like automated lane keeping and collision avoidance.
And it has doubled down on its data-center business, supplying companies likeAmazon.com Inc. and Microsoft Corp. that are spending tens of billions annually on hyperscale cloud-computing facilities.
Hitching Broadcom, whose management style has driven a sevenfold increase in its share price over five years, to Qualcomm, whose products form the bedrock of the mobile market, could threaten Intel’s progress in all three areas.
Broadcom declined to comment. Qualcomm didn’t immediately respond to requests for comment.
Qualcomm has focused on developing key cellular technology, playing a leadership role in 5G. That research keeps its chips ahead of the competition, and it has resulted in a patent portfolio that yields a royalty on nearly every smartphone sold, whether or not they contain Qualcomm chips—a revenue stream that typically provides most of Qualcomm’s pretax profit.
Since early 2017, though, Qualcomm has been in a bitter legal war with Apple over its royalty rates, which the iPhone maker alleges are unfair. Qualcomm hasn’t been able to resolve the conflict quickly, and Apple is considering replacing Qualcomm chips entirely with products from rivals including Intel.
Broadcom also sells chips to Apple, and its chief executive, Hock Tan, claims to have a strong relationship with the iPhone maker. If Broadcom takes over Qualcomm, he believes he could resolve the Apple dispute. In that case, Apple could boost Qualcomm’s presence in iPhones at Intel’s expense, especially as 5G ramps up in coming years.
A combined Broadcom-Qualcomm also could wreak havoc on Intel’s ambitions in self-driving cars. Qualcomm’s acquisition of NXP awaits antitrust approval in China, its final regulatory hurdle, which Qualcomm has said it expects soon. Completing the purchase would pave the way for Qualcomm’s 5G chips and self-driving tech. The extra heft that Broadcom would give that combination could create a counterweight to Intel and Mobileye.
Broadcom also sells switches to makers of data-center equipment, while Qualcomm is pushing into data centers with server processors that compete directly with Intel’s. The prospect of selling Qualcomm’s server chips through Broadcom’s data-center channels may give Intel pause.
And Mr. Tan likely wouldn’t stop there. He built Broadcom on a string of ever bolder acquisitions. Having rolled up Qualcomm—if his takeover effort gets that far—he could continue to enlarge his portfolio of market-leading franchises, potentially blocking Intel’s efforts at every turn.