Intel (INTC +1.70%) reportedly considered buying Broadcom (AVGO +1.29%), according to the Wall Street Journal, as a defensive move against Broadcom's hostile bid for Qualcomm (QCOM 0.06%) -- which was recently blocked by President Trump. However, the death of the Broadcom deal doesn't necessarily mean that the idea of Intel buying Broadcom is dead, since it would still help it counter Qualcomm in the mobile market.
If Intel actually makes a bid for Broadcom, it would eclipse Broadcom's $117 billion offer for Qualcomm (which currently has an enterprise value of $81 billion) as the largest tech takeover attempt in history. Broadcom has an enterprise value of $110 billion, and a comparable 40% premium would peg a potential deal at $154 billion -- excluding the value of Qualcomm and NXP, which Qualcomm is still attempting to acquire.
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The math makes little sense
$154 billion is equivalent to 60% of Intel's enterprise value of $256 billion. It's also a massive figure compared to the $14 billion in cash and investments it reported at the end of 2017. Intel holds about $27 billion in overseas cash and investments, which it will likely repatriate in the near future due to tax law changes. However, Intel is also weighed down by $25 billion in long-term debt.
Even if Intel scrounged up every last dollar, used tens of billions of dollars of its own stock, and took on more debt to fund the deal, there's no guarantee that it could come up with a figure that would satisfy Broadcom.
Takeovers also generally occur when the target company is in a weakened state -- like Broadcom's bid for Qualcomm after the latter's licensing business was gutted by regulators, defiant OEMs, and lawsuits from Apple (AAPL +1.10%). Broadcom, however, has been firing on all cylinders, and investors have cheered on the chipmaker's inorganic growth strategy.
That's why Broadcom's stock doubled over the past three years and now trades at 63 times earnings, compared to the industry average of 37 for semiconductor makers. Looking ahead, Broadcom trades at just 13 times forward earnings -- which indicates that Intel needs to offer a hefty premium to get the chipmaker's attention.
The strategy wouldn't make sense
Intel already made some big acquisitions over the past 30 months, including its $15 billion takeover of Mobileye, the world's top maker of advanced driver-assistance systems (ADAS), and its $17 billion purchase of Altera, a leading producer of programmable chips. Those acquisitions complement its smaller purchases of computer vision companies Movidius and Itseez.
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Those deals diversified Intel's business away from PC and data center CPUs, while expanding its presence in next-gen markets like driverless cars and autonomous drones. They also complement the growth of Intel's higher-growth "data-centric" Internet of Things (IoT), non-volatile memory, and programmable chips.
If Intel buys Broadcom, it would add a massive portfolio of wired infrastructure, wireless communications, enterprise storage, and industrial chips to that mix. That move would initially boost Intel's revenues (by more than 30% annually), but it would also scatter the chipmaker's attention across too many markets.
If Intel tries to integrate all those businesses at once, it could suffer from acquisition indigestion -- which would allow more streamlined rivals like Qualcomm to gain the upper hand. Intel could also spend so much money on Broadcom that it fumbles key upgrades for its CPU architecture, which would be a boon to rivals like AMD.
So why would Intel even consider buying Broadcom?
If Intel really considered buying Broadcom, it was likely a knee-jerk reaction based on fear instead of logic.
Image source: Apple.
Intel's only real foothold in the mobile market is its production of baseband modems for Apple's iPhone. Apple splits those orders between Intel and Qualcomm.
Broadcom is a top Apple supplier, and provides wireless charging ICs, power amplifiers, touch screen controllers, and other chips for iPhones. If Broadcom buys Qualcomm, it would also add its baseband modems to the mix, which would give it tremendous bundling power and clout in supply negotiations.
Apple and other smartphone makers would naturally choose Broadcom/Qualcomm bundles instead of buying Intel's stand-alone modems -- which is less of a concern after President Trump's move. But even if Intel bought Broadcom (without Qualcomm), it would instantly regain a big presence in the mobile market.
The bottom line
Investors should take the recent rumors with a grain of salt. The ongoing consolidation of the semiconductor market could certainly threaten Intel, but Intel probably won't jump into the fray until the outcome becomes clearer.
