A few buckets of cold water on the Broadcom-Qualcomm-Intel merger talk

The M&A activity in the chip business isn’t restricted to the big guys snapping up promising startups. The titans are talking marriage, but really, there should be no merger between any of the three giants that are Intel, Broadcom, and Qualcomm.

On Friday, The Wall Street Journal reported that Intel was closely watching Broadcom’s hostile bid for Qualcomm in the hopes that Broadcom would fail so it could buy Broadcom. The deal would be valued at an insane $170 billion.

Intel issued a denial over the weekend, saying it was only looking to assimilate and absorb several recent acquisitions.

The White House steps in, stops Broadcom-Qualcomm merger

Meanwhile, the Broadcom-Qualcomm talks persisted despite Qualcomm’s resistance to the idea until Monday, when President Donald Trump issued an executive order blocking the merger, citing national security concerns. I didn’t think he could do that.

“There is credible evidence that leads me to believe that Broadcom Limited, a limited company organized under the laws of Singapore (Broadcom) … through exercising control of Qualcomm Incorporated (Qualcomm), a Delaware corporation, might take action that threatens to impair the national security of the United States,” the White House said in a statement issued on Monday. Both companies were ordered to immediately abandon the proposed deal.

Broadcom’s ownership is easy to miss if you haven’t been following things. Since they are a major Orange County, California, employer and one of the biggest firms in the county, I’ve heard every move. Singapore-based Avago Technologies, which also bought LSI Logic and just bought Brocade, acquired Broadcom in 2015 for $37 billion and shook things up, moving the headquarters to San Jose, California, just as Broadcom was building a massive campus in Irvine, California. About 700 people lost their jobs in a 2016 restructuring.

While Broadcom has an admirable current ratio of $15.8 billion in current assets to just $2.5 billion in current liabilities as of Oct. 29, 2017, it’s also sitting on $17 billion in long-term debt and another $11 billion in long-term liabilities.

Intel’s long-term debt, according to its most recent annual report, is $25 billion. So if the merger took place, you are talking $53 billion in existing long-term debt, plus who knows how much piled on to leverage the buyout because there’s no way Intel has the cash and credit for a $170 billion acquisition.

And that would kill it.

Let Toys R Us be an example for all

We already see one example. Toys R Us is about to curl up and die, but its demise isn’t another case of Amazon killing brick and mortar — although Amazon is a player here. In 2005, the Toys R Us board of directors sold the company to the private equity firms Bain Capital and KKR for $6.6 billion. Toys R Us became a private company with more than $5 billion in debt and then Amazon made its move.

To compete, Toys R Us needed to invest heavily, especially in online, because really, who wants to take their kid to a toy store? Unfortunately, most of its cash went to paying off the massive debt. Like most leveraged buyouts, it left the company with a lot of debt and almost no cash. And that killed a venerable chain. It simply couldn’t meet the Amazon challenge.

Similarities with Dell

Something similar is going on with Dell. Michael Dell famously took his company private in 2013 through a leveraged buyout through Silver Lake. And while Michael won’t shut up about how wonderful it is not to have to deal with Wall Street analysts second guessing his every move, it left Dell with a lot of debt. Then in 2016 it piled on with the $67 billion acquisition of EMC Corp.

The result? Dell is now sitting on $46 billion of debt, according to data compiled by Bloomberg, with $3 billion of bonds maturing in 2018 and $4.35 billion due in 2019 on top of outstanding loans. So, now Dell is considering the unthinkable: an IPO, for no other reason than to pay off debt for taking the company private in the first place. Or perhaps selling off its cloud computing venture Pivotal, which could fetch $5 billion to $7 billion.

Debt is death. I once worked for a company that tried to achieve growth through acquisitions. All it did was choke to death on bad purchases.

Nvidia is doing things right

Intel, Broadcom and Qualcomm need to take a lesson from Nvidia. It is sitting on a mere $2 billion in long-term debt, has done tiny acquisitions about once every two years, and is cleaning everybody’s clock. There’s a reason for it.