Mountain of Debt Casts Shadow Over Broadcom-Qualcomm Deal




A Qualcomm Snapdragon chip, used in smartphones and tablets. Broadcom is willing to pay Qualcomm shareholders a 28 percent premium over last Thursday’s closing stock price.

David Becker/Getty Images

Chip makers like Freescale Semiconductor and NXP Semiconductors took a high-profile role in the leveraged-buyout binge that preceded the financial crisis — and the distress that followed it. That makes Broadcom’s roughly $105 billion unsolicited offer for Qualcomm on Monday all the more edgy.

The borrowing associated with a deal, if it happens, could be in record amounts and may send ratios of debt-to-Ebitda (earnings before interest, taxes, depreciation and amortization) uncomfortably high.

Broadcom’s chief executive, Hock Tan, is facing two sources of uncertainty. One is whether his counterpart, Steve Mollenkopf, is willing to engage over the deal, which offers a 28 percent premium over Qualcomm’s closing stock price on Thursday, before word of a potential bid began to spread. So far, Qualcomm’s response has been noncommittal.

The other problem facing Mr. Tan is Qualcomm’s ongoing $38 billion bid to buy NXP — which listed shakily in 2010 and bought Freescale in 2015. Mr. Tan said he would take Qualcomm with or without NXP.

Then there’s sheer scale. The bid, worth $130 billion including Qualcomm debt, according to Broadcom, would require nearly $90 billion in cash. The private-equity outfit Silver Lake is providing $5 billion in convertible debt, with the rest to be raised by Bank of America, Citigroup, Deutsche Bank, JPMorgan and Morgan Stanley. Add in the companies’ existing net debt, and the new group’s total would be over $100 billion, even if more cash accumulates before the deal closes. That’s four or five times the $23 billion in combined Ebitda that Broadcom is expecting, including cost savings.

Consolidation among makers of chips for mobile phones, cars and the rest is all the rage, and Mr. Tan is an experienced deal maker with a record of quickly bringing debt down after acquisitions. But it’s still a cyclical industry. The merged company would have to keep big customers like Apple happy, which might mean cutting prices. Meanwhile, $3 billion in annual cost reductions, taxed and capitalized, are worth about the same as the roughly $22 billion premium, so Broadcom isn’t keeping much for its own shareholders.

At least one deal hurdle — Washington’s examination of foreign acquirers — has been pre-empted. The Singapore-domiciled Broadcom will move to the United States, Mr. Tan said last week in a news conference with President Trump. Investors seem to have caught the good feelings, pushing up the stock of both companies to the tune of more than $20 billion altogether since Thursday.

As it happens, both Freescale and NXP survived a turn in the cycle despite excessive leverage. But the distress they went through should give pause for thought.

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