Chip giant Broadcom (AVGO 0.90%) recently announced a revised $82-per-share bid for wireless giant Qualcomm (QCOM 2.86%) -- up from the $70-per-share bid that it had announced previously and that Qualcomm had ultimately rejected.
Unsurprisingly, Qualcomm rejected Broadcom's new offer, though it left the door open for further negotiation .
Qualcomm, in a regulatory filing, also listed what it believes will be numerous regulatory hurdles that Broadcom would face in trying to close this deal. In that list, Qualcomm made the following claim:
[Two] customers providing Qualcomm chipset revenues in excess of $1 billion each per year have stated that they are likely to move designs away from Qualcomm in the event that this transaction moves forward. This is due to their lack of confidence in Broadcom's ability to continue to lead in technology.
Although this might seem like a significant roadblock for any such deal, especially considering that Broadcom seems to want to buy Qualcomm for its dominant mobile processor position, I think this is nothing more than a bluff.
Here's why.
Where are customers going to go?
The first question that shareholders need to ask is the following: From whom will these current Qualcomm customers buy chips if they lose faith in Qualcomm?
Qualcomm's main competitor in the merchant processor market is MediaTek. MediaTek is a significant player in the low-end and mid-range of the smartphone market, but it has generally lagged behind Qualcomm in terms of technology capability, limiting MediaTek's penetration into premium smartphones.
It seems highly unlikely that under Broadcom, Qualcomm's technology development would slow down to the point where major smartphone brands decide that MediaTek is a superior technology provider.
Moreover, it would be nonsensical for Broadcom to acquire Qualcomm for its leadership mobile processor position only to destroy that value by not properly funding the development of future mobile processors.
Beyond MediaTek, there are a few other minor players like Spreadtrum, which, once again, aren't even in the same zip code as Qualcomm in terms of technology depth and breadth.
There are, of course, other vendors that build mobile processors that are competitive with Qualcomm's in terms of technology: Samsung (NASDAQOTH: SSNLF) and Huawei's chip division, HiSilicon.
Although Samsung has been stepping up its efforts to sell chips to other smartphone makers (Samsung itself is the world's largest smartphone maker by unit shipment volumes), the reality is that Samsung's position as a major smartphone maker introduces a huge conflict of interest that could lead prospective customers to shy away.
Were HiSilicon interested in entering the merchant mobile processor market (to my knowledge, its chips are only used in Huawei's phones), it would also face the same major conflict of interest that Samsung does, as Huawei is the world's third-largest smartphone vendor and hasn't been shy about its aspirations to become the world's largest.
I think it's pretty clear that the two customers that Qualcomm referenced -- unless they are, in fact, Samsung and Huawei (both companies do use Qualcomm processors in some of their smartphone models) -- have nowhere else to go.
And, if those two companies are the customers that Qualcomm is referencing, then the reality is that both Samsung and Huawei are investing so much in their own chips that Qualcomm's days in smartphones made by both companies is probably numbered, anyway.
