Yahoo Finance Broadcom's Reputation Took an Unfair Hit During Qualcomm Saga
One of the criticisms levied against wireless chip maker Broadcom (NASDAQ: AVGO) when it tried to buy and ultimately attempted a hostile takeover of Qualcomm (NASDAQ: QCOM) late last year was that it wasn't as innovative as the company it wanted to acquire.
Industry analysts who opposed the deal claimed, in effect, that Broadcom would buy Qualcomm, gut its research and development efforts, and leave it the shell of the company that it was as a stand-alone entity. But Broadcom's strategy when it acquires another company isn't a rudderless overtaking, as critics describe.
Image source: Qualcomm.
Deal drama
Late in 2017, Broadcom offered to buy fellow wireless chip maker Qualcomm (NASDAQ: QCOM) for $70 per share. Qualcomm's board of directors wouldn't have it, so Broadcom came back with an $82 bid that the company called its "best and final offer."
Although that offer would have given the company's stockholders a nice payday, Qualcomm's board -- once again -- snubbed that offer. Broadcom, however, didn't back down. It nominated a slate of candidates for Qualcomm's board of directors that, presumably, would approve the deal. Things were going well for Broadcom's attempt to replace Qualcomm's board with its own directors when President Trump issued an executive order blocking the transaction and any other one similar to it.
Qualcomm won its fight against the takeover, although its shareholders lost because the stock is trading well below Broadcom's offer price as of this writing. But why was there so much fear that Broadcom would dismantle something it fought to acquire?
Broadcom invests, but it invests wisely
It is true that when Broadcom buys a company, it'll often keep certain divisions and product lines, and spin off or shutter others. For example, when the predecessor to the current Broadcom, Avago, bought a company called LSI, it kept LSI's hard disk drive controller franchise as well as other enterprise storage-related businesses.
The company did, however, sell off LSI's network chip product line, known as Axxia, as well as LSI's solid state drive controller business, known as SandForce. Avago's, and now Broadcom's, goal is to fill its business portfolio with franchises that are leaders in their field (or close seconds that could be leaders) and generate significant gross and operating profit margins. Neither the Axxia business nor SandForce were going to meet Avago's business objectives.
In the businesses that Broadcom does choose to invest in, it does so substantially. Put bluntly, it invests to win. How else could Broadcom maintain leadership positions in the markets that it does serve? Developing chip technologies is an expensive endeavor that only gets pricier with time -- a company can't hope to build leadership products and technologies without significant (and ever-increasing) investments.
For example, while Qualcomm is held up as a steward of technology innovation while Broadcom is seen as a ruthless cost-cutter. The reality is that Broadcom's research and development spending grew from $829 million in the quarter that ended on April 30, 2017, to $936 million -- a 12.9% boost -- in the quarter that ended on May 6, 2018.
Qualcomm, on the other hand, just announced that it plans to implement a cost reduction program to reduce its spending by $1 billion. This measure is reportedly set to, among other things, include a scaling back -- if not outright winding down -- of its data center processor business.
A fairer view of Broadcom's approach
Broadcom is a company that's judicious in its spending, but that's not to say that it's not innovative or that it's stingy. A fairer characterization of Broadcom's research and development efforts is that it invests heavily in markets where it's already a leader, and if it wants to get into a new business, it buys a leader in that field and invests heavily in that business.
What Broadcom doesn't do is try to enter pre-existing markets organically, nor does it hang on to business assets that aren't leadership material. This allows Broadcom to be far more efficient with its research and development dollars than many of its competitors are while also consistently delivering compelling product innovation to the market year-in and year-out.
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Ashraf Eassa owns shares of Qualcomm. The Motley Fool owns shares of Qualcomm. The Motley Fool recommends Broadcom Ltd. The Motley Fool has a disclosure policy.
