Bernstein Research issued a research note on Broadcom (NASDAQ: BRCM) in which it pondered the possibility that Broadcom would entirely exit the wireless baseband and connectivity business for good. This would certainly be a drastic move, but it's one that is certainly worth looking into, even if such an exit is a fairly remote possibility in light of management's continued aggressive moves in this space. That being said, there is a real case to be made for Intel or Apple to buy Broadcom's mobile business outright.
Why would Apple want it?
Apple is a company that typically wants as much control over its supply chain as possible. This is the reason why the company now has multiple in-house processor/system-on-chip teams. Now, while the low-end Asian mobile system-on-chip vendors, as well as Qualcomm (QCOM +11.19%) at both the low and the high end, have taken to integrating connectivity and cellular functionality into their mobile chips, Apple has yet to do so.
While some may argue that Apple could continue to use discrete cellular and connectivity components forevermore, there will likely be significant advantages to moving some of that functionality onto the die of Apple's in-house chips – it's almost inevitable that at least the digital portions of these connectivity features end up on-die longer term. Developing this functionality in-house without acquiring a more experienced player would be very costly and have a very limited shot at success over any reasonable timeframe. If Apple is going to want to integrate cellular and connectivity functionality onto its chips, it's almost certainly going to have to buy it.
In addition to a top-notch set of connectivity IP, Apple would also get a solid set of cellular baseband IP and talent. While Broadcom has yet to deliver on the LTE promise (it's coming in Q1 2014, though), it has a world-class engineering team and IP that will, sooner or later, be very competitive. With Apple's enormous cash flow, it could easily afford to buy and develop the Broadcom cellular team. Broadcom would gain a lot of cash, and Apple would eventually be rid of its dependence on Qualcomm for its cellular baseband/RF (which is the most expensive silicon content in the iPhone bill of materials).
What about Intel?
The potential acquirer that Bernstein's report highlighted in its report was Intel (INTC +23.60%). Intel has been feverishly working to build out its own cellular efforts via its acquisition of Infineon Wireless, as well as the build out of a fairly new team in San Diego. The company's efforts – like Broadcom's – have met with limited success at the high end. While the firm's XMM 7160 multimode LTE voice and data modem should be shipping with its "Merrifield" platform by the end of the year, and while its LTE-Advanced successor, XMM 7260, should roll out during the first half of 2014, it – again, like Broadcom – still has plenty to prove.
That being said, Intel could probably benefit from having Broadcom's wide swath of connectivity assets (while Intel has Wi-Fi and Bluetooth, it's not clear if these are notebook/desktop only) and gobbling up more of the world's cellular baseband and RF engineers and IP certainly wouldn't hurt in the fight against Qualcomm. And, for good measure, it'd keep this choice set of IP out of the hands of Apple or Samsung (both of whom are becoming increasingly vertically integrated with respect to silicon) which would mean that Intel would have a better shot of selling its chips to both of these players.
What would be left of Broadcom?
As Bernstein's analyst notes, Broadcom would be left a significantly smaller company if it were to simply sell its wireless business – roughly half of its revenues would disappear nearly overnight. That being said, it is widely believed that a good portion of Broadcom's stock based compensation (which has been a drag on GAAP net income) is due to the feverish investments in connectivity and cellular, so the large losses incurred in Broadcom's "all other" reporting segment – which includes the effects of stock based compensation – would subside.
However, implementing this would effectively end Broadcom as a growth name despite what would likely be a very handsome payday for shareholders as the result of such a sale. The current management team is very much about growth (which is why they have been serial acquirers) and divesting its largest, highest growth potential business just seems out of line with this company's long term story.
