Qualcomm is undervalued – Broadcom wants to buy the competitor for $130 billion
$ 70 per Qualcomm share and approx. $ 25 billion of net debt: that's what Broadcom is willing to pay to buy the competitor against its will. In the new it is announced to become as the largest company acquisition in the semiconductor industry so far.
Broadcom could become the third-largest chipmaker in the world
Qualcomm develops wireless telecommunication technologies primarily for mobile devices such as smartphones or tablet computers. The company has more than 25.000 alive patent families and earns royalties for their use. Broadcom specializes in the production of Wi-Fi and Bluetooth chips. The merger could make Broadcom the third largest chip provider in the world behind Intel and Samsung.
Broadcom chooses the right moment - shares are cheap through the patent dispute with Apple
The semiconductor company Broadcom probably chooses a critical time deliberately - months of dispute with Apple have negatively affected the share price of the chip manufacturer. The lawsuit battle became crucial. After Apple announced, it wishes to produce the future smartphone models completely without Qualcomm chips, the share prices decreased and are now below its average.
Apparently, Broadcom is not deceived by the negative performance of the stock price and recognizes the strengths of the innovation-oriented company. A look at the company's patent portfolio and the profitability of its Research & Development expenditures shows: Qualcomm is unique within its peer group when it comes to innovation.
Qualcomm: top patent portfolio and outstanding R & D profitability
The current discussion is a good opportunity to compare the diversification and patent portfolio development of both companies. As seen on the graphs, the patent portfolio distributions on the sector level are very similar. The two largest IPC classes of both chip manufacturers are H04 (electric communication technique) and G06 (computing; calculating; counting).
If you choose one deeper level (technical field level), the differences become visible: the largest technology sector of Qualcomm is the H04W (wireless communications networks) with about one third (€ 9,8 bn) of the total patent portfolio value in this IPC class. The same sector by Broadcom is much smaller (€ 462m) and is presumably one of the reasons of Broadcom´s interest in Qualcomm. Patents for the promising new broadband 5G standard also belong to this sector.
By analyzing the complete patent portfolios in term of their total value, a huge difference between the competitors is obvious: In March 2017, the patent portfolio value of the US company Qualcomm is seven times higher than that of Broadcom. The value trend of Qualcomm is continuously rising: the patent portfolio value has increased by factor 5 within the last 6.5 years.
Here it´s important to mention, that the enormous patent value increase is not only because of the rising number of patent applications, but also as a result of the growing patent quality: the indicator for it is the average patent value.
R&D Efficiency of Qualcomm
Qualcomm's R&D budget is huge at $ 5.5bn, more than the double size of Broadcom ($ 2.2bn), but it only slightly above the industry average of the top 42 companies in the IT sector ($ 3,5bn) – for example the biggest competitor Intel spent 2015 more than $ 12.3bn on research and development.
However, if we compare this figure with the increase in patent values in the following year (as an indicator of the direct impact / impact of R&D expenditures), then Qualcomm performs significantly better than Broadcom or Intel.
Most obviously Qualcomm has done it homework: the return of R&D expenses in form of patent value is four times higher than the investment. With this impressive output Qualcomm has a leading position among other chip manufacturers – this means, better ideas for more attractive markets are being produced at Qualcomm. This makes the intention of Broadcom´s offer clear: they expect a significant boost in technology and use the situation during the license fee dispute between Apple and Qualcomm.
What is more: these intellectual property assets are not shown anywhere in the books: In the Qualcomm´s balance 2016 € 8,2bn of intangible assets are visible – the total patent portfolio value in this year is more than € 25bn – the company has significant more value as the investors suppose. However for Broadcom it seems to be clear.
Data source: IP Business Information B.V.