Will Apple and Samsung Start a Bidding War For This Asset?

When Broadcom (NASDAQ: BRCM) announced earlier this month that it would exit the smartphone apps processor and modem business, the crowd went wild and the stock gained north of 20% over the following weeks. While the market is likely pricing in a shuttering of the business (i.e., the savings from closing up shop), there could be additional upside from a potential sale to either Samsung (NASDAQOTH: SSNLF) or Apple (AAPL 0.52%).

More sellers than buyers
Many vendors have exited the mobile chip business in recent years. These businesses ultimately ended up simply being wound down as their operators had difficulty finding suitors.

Broadcom's comments on its most recent earnings call (suggesting a robust technical pipeline) indicate this situation may be different, as the company may have laid a more solid technical foundation for a deal. That remains to be seen. 

Samsung has a struggling baseband business; Apple has nothing at all
At this point, if Broadcom were to sell this division, Samsung and Apple would be the only logical suitors. Samsung actually has its own internal baseband division, but the execution hasn't been great there. Most of the company's phones today use baseband chips from external players, and perhaps Broadcom's modem assets could give Samsung's own efforts a boost.

Apple, as secretive as it is, probably doesn't have a fully fledged baseband team in-house today (although recent hiring suggests it may be exploring the possibility of building such a team). As there seems to be an industry trend toward integrating the baseband processor onto the applications processor (Qualcomm (NASDAQ: QCOM), the leading vendor of discrete and integrated modems and applications processors, will tell you that an integrated solution offers performance/power benefits), Apple could be interested in this asset in order to integrate that functionality into its own A-series processors found in the iPhone/iPad.

While the financial benefits of bringing that R&D in-house aren't immediately clear (would increased R&D offset any cost of goods sold benefits?), performance/power benefits could make this interesting to Apple. 

A bidding war?
To get an idea of how much Broadcom's mobile business could go for, below is a table of some of the acquisitions in this space:

Source: Company press releases.

Given that the biggest such deal in recent history was Intel's (INTC 1.77%)acquisition of Infineon Wireless, this seems like an upper limit for what Apple/Samsung would likely pay. However, the offset here is that Broadcom just bought Renesas' core LTE assets and development pipeline for $164 million in what was a "competitive" bidding process.

Broadcom likely added value to the Renesas assets with its prior in-house efforts (in particular, Broadcom had TD-SCDMA technology that is critical for China, which Renesas Mobile did not). Add in whatever research and development was sunk into the effort from September to June, and the Renesas assets could be worth more along the lines of $300 million-$500 million.

Foolish takeaway
If Broadcom doesn't sell this asset, it still saves big time on R&D, thus juicing the bottom line (a more detailed look can be found here). If it does, it could be a pretty nice payday for shareholders, particularly if Broadcom pays whatever it gets for the unit as a special dividend. Just as before, this situation is a win/win for Broadcom and its shareholders.