A Financial Times report yesterday states that former Qualcomm CEO Paul Jacobs, who was recently removed as executive chairman from the board of directors and moved to a standard sitting role on the board, is in talks with “several global investors” to buy out the San Diego chip giant. Of the key potential partners in this deal is SoftBank, an international conglomerate holding company that owns or has key holdings in companies like Arm, Sprint, and Alibaba.
This potential buyout could drastically shift the landscape of the technology market, maybe even more than the recently killed acquisition attempt by Broadcom. There are key differences in the two business deals, as the operational styles of Broadcom and SoftBank could not be more opposed. SoftBank fosters innovation and R&D, pushing the companies it acquires forward rather than initiating harsh cut backs to drive margin.
I would expect that Qualcomm’s stated plans of $1B cost reduction as part of its promise to shareholders during the Broadcom acquisition process would be reduced or removed if Jacob’s plan to bring in SoftBank were to succeed, increasing its investment into adjacent and leadership markets.
The company with the most to lose in this rumored buy out would be Intel, as a combined Qualcomm and Arm technology house would add significant pressure to the many markets in which the three are competitive including mobile PCs, IoT, automotive systems, data center, and more. Other Arm partners that license the Arm processor architecture for thousands of usage models would also potentially see problems with the deal as it could set up an antitrust hurdle.
Would CFIUS intervene again?
Now that the drama around the Broadcom acquisition has been officially halted with the Trump statement based on CFIUS security concerns, Jacobs appears to be capitalizing on peak recognition on the value of Qualcomm to the mobile and technology markets with his drive for a buyout. There would clearly be another investigation from CFIUS if SoftBank, a Japanese company, wanted to purchase the chip giant, but the parameters would look quite different.
The biggest part of the CFIUS claims centered on the presumed reduction in R&D and resulting falloff of Qualcomm’s status as a leader in the mobile technology space. SoftBank has a very different reputation and tends to let companies it purchases continue on their own path, augmenting them with additional income to finance growth opportunities.
SoftBank is one of the 50 largest holding companies in the world, that owns completely or significant shares of many technology and services companies. These include Arm, Boston Dynamics, Sprint, Alibaba, Uber (plus several international ride sharing companies), NVIDIA, and Brightstar (the largest mobile device distributor). SoftBank now operates companies across a wide range of categories including broadband, telecom, e-commerce, finance, media, and semiconductor design.
Qualcomm and Arm creating an interesting combination
SoftBank’s ownership of Arm is particularly interesting when considering its rumored buyout of Qualcomm. Arm is the processor architecture provider to Qualcomm and the San Diego company is likely Arm’s largest licensee. While Qualcomm used to use this license to build its own completely customer cores, it has recently moved to licensing Arm-built designs with slight modifications.
Both Arm and Qualcomm independently develop processors for graphics, image processing, artificial intelligence, and machine learning. Combining the expertise of both organizations would create a powerful competitor in the compute space.
Arm doesn’t currently develop modem technology while for Qualcomm that is considered its flagship technology area.
Arm and Qualcomm are fighting many overlapping fights against Intel and others.
· Arm and Qualcomm are both pushing for a new hyperscale architecture of processors to take market share in the data center space where Intel has a dominant leadership position.
· Qualcomm is targeting Intel with its creation of the Always Connected PC that combines mobile chips with standard Microsoft Windows 10 for better battery life and persistent cellular connectivity. Arm has been helping in the marketing and development efforts.
· Arm and Qualcomm are building out technology and infrastructure for the growth of IoT (internet of things) and edge computing, a space that Intel is utilizing its power efficient processors.
· Both companies are creating systems for the automotive industry around autonomous driving and infotainment, competing against NVIDIA, Intel, and others.
The potential ownership relationship between Qualcomm and Sprint would also create a unique partnership potential. It would provide an outlet for early integration of key Qualcomm 5G (and forward looking) wireless infrastructure and design. As Qualcomm improves modem technology it would benefit by having a cellular carrier that is willing to adopt early, helping maintain a leadership position over rivals Huawei and Intel.
There appears to be numerous other potential synergies between Qualcomm and the current inventory of SoftBank invested companies. Uber and other international ride share services create potential for self-driving and infotainment integration; Boston Dynamics could utilize the AI and machine learning capabilities in its robotics systems; mobile advertising and social networking system might be able to employ Qualcomm hardware for advanced services.
Conflict with Arm partners
Even with the potential upside, there are critical potential hurdles to get past with any proposed deal. First, the arrangement would have to go through a CFIUS review and with the very recent, very public result on Broadcom, the administration would have to clearly lay out why this is different from the previous conflict.
Past even the foreign investment risk is a potential problem with global trade regulation bodies that might view this as anticompetitive, combining the largest Arm licensing partner directly with Arm. Additionally, NXP is another major licensee of Arm processor technology, and the near-final purchase of it by Qualcomm would elevate this risk.
SoftBank would also risk alienating other Arm partners with the buyout, including the likes of Broadcom, Huawei (HiSilicon), Samsung, Texas Instruments, and others. All would rightfully fear that Qualcomm would get preferential treatment and early (or sole) access to new, advanced technologies before the rest of the ecosystem. Arm is easily the most utilized processor architecture globally, so disruption to this business would be a serious concern.