Episode 48 Qualcomm Broadcom

In episode 48 of Acquired, hosts Ben Gilbert and David Rosenthal discuss the potential acquisition of Qualcomm by Broadcom, a deal that would mark the largest tech acquisition in history at over $103 billion. They explore the implications of such a merger in the semiconductor industry, where both companies operate as fabless manufacturers, designing chips for a wide array of devices from phones to cars, amid a backdrop of increasing vertical integration by major players like Apple. The episode also touches on the current legal battles Qualcomm faces, Broadcom's strategic relocation to the US for regulatory advantages, and the broader trend of consolidation in the chip market driven by the need for economies of scale and supplier power. Additionally, the episode features sponsorship from pilot, a startup-focused accounting firm, and a discussion on the resurgence of interest in silicon within Silicon Valley.

• Ben Gilbert and David Rosenthal introduce Episode 48 of Acquired, a podcast focused on technology acquisitions and IPOs.
• The episode discusses the potential acquisition of Qualcomm by Broadcom, which would be the largest tech acquisition in history.
• The acquisition offer of $103 billion was rejected on the day of recording.

"Welcome back to episode 48 of Acquired, the podcast about technology acquisitions and ipos. I'm Ben Gilbert."

This quote introduces the podcast and its hosts, setting the stage for the episode's discussion.

"Today we are covering what would be the biggest tech acquisition of all time, Broadcom acquiring Qualcomm."

This quote highlights the main topic of the episode, the proposed acquisition of Qualcomm by Broadcom.

• Both Broadcom and Qualcomm are fabless semiconductor companies, meaning they do not own fabrication facilities to manufacture chips.
• The companies design chips and work with contract manufacturers to produce them, which are used in various devices, including phones, computers, and servers.
• The industry has seen an IoT (Internet of Things) explosion, with chips being used in a wide array of everyday devices.

"They're both effectively fabless semiconductor companies. So neither of them have fabs, which are the fabrication facilities that actually manufacture the chips these days."

This quote explains the business model of Broadcom and Qualcomm as fabless semiconductor companies, which design but do not manufacture chips.

• The podcast has a Slack community with over a thousand members for discussions on M&A, IPOs, and tech news.
• Listeners are encouraged to leave reviews on Apple Podcasts to support the show.

"We've got a slack where we are over a thousand strong. So if you like to talk about m a ipos tech news or just add another slack, because Lord knows we cannot be in too many of those."

This quote invites listeners to join the Acquired podcast community on Slack for further discussions.

• Pilot is a company providing accounting, tax, and bookkeeping services for startups and growth companies.
• They are the largest startup-focused accounting firm in the US, backed by notable investors like Sequoia and Jeff Bezos.
• Pilot operates the financial stack for companies, allowing them to focus on their core product and customers.

"Pilot is the one team for all of your company's accounting, tax and bookkeeping needs."

This quote introduces Pilot, the episode sponsor, and their services for startups and growth companies.

• The semiconductor industry is experiencing a renaissance with the rise of machine learning and demand for specialized chips.
• Nvidia has seen significant growth due to its GPUs being used in machine learning, with a substantial increase in share price over two years.
• Startups like Graphcore are raising substantial funding to compete in the semiconductor market, particularly for machine learning chips.
• The industry has consolidated around a few major fabrication companies due to the high costs of manufacturing, creating a platform for design-focused startups.
• Apple has increasingly brought chip design in-house, but Qualcomm and Broadcom still produce components for devices like the iPhone and Pixel.

"It turns out graphics cards are good for more than just graphics. Who knew linear algebra, matrix transforms, really good for games and for rendering. And it just so happens for the core technology, that's a piece of every new technology now. Machine learning."

This quote discusses the unexpected utility of GPUs in machine learning, beyond their traditional use in graphics, highlighting Nvidia's success.

"So suddenly you have this platform where you don't need the actual capital to do the manufacturing yourself, so you can start a smaller company to just do designs, to either license your designs to work with these manufacturers."

This quote explains the shift in the semiconductor industry that allows design-focused startups to emerge without owning manufacturing facilities.

"Inside the iPhone X, Qualcomm makes the gigabit LTE transceiver. They also make the LTE modem... The iPhone X has broadcom chips for wireless charging, for the power amplifier module, and for the touchscreen controller."

This quote provides specific examples of Qualcomm and Broadcom components found in popular devices, illustrating the companies' relevance in the current tech landscape.

• The iPhone X and Pixel 2 XL smartphones contain numerous components from Qualcomm and Broadcom.
• Qualcomm and Broadcom do not compete in the main CPU area but do compete in other areas such as radios, Bluetooth, and WiFi components.
• There are no Broadcom components identifiable in the Pixel 2 XL, suggesting that Broadcom may not be as dominant in certain areas.

"So the bottom line here is the iPhone X and the Pixel two XL both have a ton of Qualcomm and Broadcom parts in them."

This quote highlights the prevalence of Qualcomm and Broadcom components in major smartphones, emphasizing their dominance in the market.

• Broadcom, now a major player in the semiconductor industry, originated from HP's semiconductor division.
• Through mergers and divestitures, it became known as Avago before merging with Broadcom and adopting the Broadcom name.
• Broadcom's history traces back to the origins of Silicon Valley with Hewlett Packard.

"But real quick, on Broadcom, I thought this was interesting. They actually merged themselves with another company called Avago last year. And actually the company today known as Broadcom really is Avago."

This quote explains the corporate evolution of Broadcom, detailing its merger with Avago and its historical connection to Hewlett Packard.

• Qualcomm was founded in 1985 by a group of academics and industry professionals, including Professor Erwin Jacobs from UC San Diego.
• The company capitalized on the network effect concept, originally associated with the telephone system, applying it to cellular telephones.
• Qualcomm's technology underpinned the competing cellular standards GSM and CDMA, with the company profiting from both through licensing.

"Qualcomm was founded back in 1985 by University of San Diego or UC, University of California, San Diego professor Erwin Jacobs, along with several other folks that he had worked with in the colleagues from academia and in the chip industry."

This quote provides background on Qualcomm's founding, highlighting the academic origins of its founders and the company's early focus on network effects in cellular technology.

• There were carrier standard wars, similar to the HD DVD vs. Blu-ray format war, with GSM and CDMA as competing standards.
• GSM was chosen by some carriers due to its architecture allowing for fewer towers with wider ranges, which was seen as a better future-proof choice.
• Qualcomm's CDMA technology was fundamental to both GSM and CDMA standards, leading to widespread licensing and revenue.

"We went with singular specifically because my dad was looking into this and decided that he wanted to make a bet on GSM. The GSM was the future."

This quote reflects a consumer perspective on the GSM vs. CDMA standards war and the strategic decisions made by individuals and carriers regarding which technology to adopt.

• Qualcomm generates significant revenue from licensing its patented technologies, which are essential to cellular communication.
• The company's focus shifted from making base stations and handsets to producing chipsets for other manufacturers' phones.
• Qualcomm's licensing model proved successful, with a substantial portion of its revenue coming from this source.

"Yeah, Qualcomm's ten k last quarter or last year was 15.4 billion in revenue from equipment and services and 8 billion from licensing."

This quote provides specific financial figures that illustrate the significance of Qualcomm's licensing revenue relative to its total income.

• The semiconductor industry is experiencing consolidation due to the high costs of research and development and manufacturing.
• Companies are merging to combine their resources and offer better deals to handset manufacturers, who are increasingly integrating chip production in-house.
• The concept of "coopetition" is prevalent, with companies simultaneously competing and cooperating in the marketplace.

"Everybody is a frenemy. Everybody is a competitor. Everybody is in coopetition."

This quote captures the complex dynamics of the semiconductor industry, where companies are constantly navigating the roles of competitors and collaborators.

• Broadcom attempted a significant acquisition of Qualcomm, which was rejected.
• The proposed deal included a mix of cash and stock and was influenced by external pressures such as ongoing lawsuits affecting Qualcomm's share price.
• Broadcom's acquisition strategy is seen as opportunistic, taking advantage of Qualcomm's temporarily depressed stock value.

"I'll make a prediction that this deal will go through at some point somewhere slightly higher than this."

This quote reflects an analysis of Broadcom's acquisition strategy and a prediction regarding the eventual success of the deal at a higher price point.

• Both Broadcom and Qualcomm are engaged in other significant acquisitions, with regulatory approval being a crucial factor.
• Broadcom's decision to relocate its legal address from Singapore to Delaware is viewed as a strategic move to avoid review by the Committee on Foreign Investment in the United States.
• These corporate maneuvers are intertwined with broader political and economic considerations.

"Broadcom announced that it would relocate its legal address from Singapore to Delaware, so it would be a us based company, which would avoid that review."

This quote explains Broadcom's legal strategy to facilitate its acquisition plans by changing its corporate domicile to the United States, thereby circumventing certain regulatory reviews.

• The tech industry, particularly the chip sector, is complex and filled with drama.
• Despite being seen as a stable industry, it is undergoing significant change.

"There is so much drama going on for what most of tech is just thought of as, like, a relatively sleepy, stable corner industry. There is massive change happening."

The quote emphasizes the unexpected complexity and dynamic nature of the tech industry, which is often perceived as stable and uneventful.

• Statsig is introduced as a new sponsor, following the CEO's appearance on ACQ two.
• Statsig is a feature management and experimentation platform for product teams.

"Statsig is a feature management and experimentation platform that helps product teams ship faster, automate a b testing, and see the impact every feature is having on the core business metrics."

The quote describes the primary functions and benefits of Statsig, highlighting its role in enhancing product development and analysis.

• Statsig provides visualizations and a stats engine for real-time product observability.
• The platform is used by companies such as Notion, Brex, and Microsoft.
• Statsig supports AI feature testing and integrates with data warehouses.

"Customers include Notion, Brex, OpenAI, Flipkart, Figma, Microsoft and Cruise Automation."

The quote lists some of the notable customers using Statsig, indicating the platform's wide adoption and credibility.

• The acquisition discussed is categorized as "other" and identified as a consolidation play.
• The companies involved make similar chipsets and are not acquiring new technologies or fab capacity.

"They're literally just buying consolidation within the existing sales channels that they're going through."

The quote explains the nature of the acquisition as a strategic move to consolidate sales channels rather than expand product lines or technologies.

• Broadcom and Qualcomm are evaluated in terms of supplier power, costs, and profit margins.
• Broadcom's revenue growth and Qualcomm's revenue decline are discussed.
• The smartphone market saturation and the impact on chipmakers are considered.

"Qualcomm has 56% profit margins. Broadcom has 59% profit margins."

The quote compares the profit margins of Qualcomm and Broadcom, which are part of the analysis to understand their market positions.

• The trend of phone makers vertically integrating chips is reducing opportunities for horizontal providers.
• The impact of successful customers potentially moving in-house for chip production is considered.

"When phone makers are vertically integrating, it means there's less room for the sort of horizontal providers of the components."

The quote reflects on the changing dynamics in the chip industry due to vertical integration by phone manufacturers.

• Broadcom and Qualcomm are expanding into the IoT space to offset smartphone market saturation.
• Non-tech companies are unlikely to vertically integrate chipsets for their products.

"Those companies, whether it's, I think this was also part of that same piece, this idea that whirlpool isn't going to start vertically integrating the chipsets in their jacuzzis or whatever, or your toaster, whoever makes your toaster isn't going to start designing their own chips."

The quote highlights the potential for chipmakers in markets where vertical integration by manufacturers is less likely.

• The discussion touches on Sequoia's investment in capital-intensive semiconductor companies.
• The contradiction between avoiding capital-intensive businesses and investing in them is explored.
• The high risk and high reward nature of the semiconductor industry is acknowledged.

"Capital intensity usually produces nightmares."

The quote from Sequoia's lessons learned references the challenges associated with investing in capital-intensive industries, which is relevant to the semiconductor sector.

• The discussion includes considerations for venture capital investments in high-risk areas.
• The importance of selecting winners in a capital-intensive market is emphasized.

"They're not zero marginal cost huge, and they're not like Facebook, you can increase your margins by 15% in one quarter. They don't have those characteristics, but they do have the characteristics of build something incredibly, incredibly valuable that are riding a wave and charge lots of money for it to lots of customers."

The quote reflects on the unique investment opportunities in the semiconductor industry, contrasting them with businesses like Facebook that have different economic characteristics.

• Venture capital funds face challenges when incorporating too many capital-intensive companies into their portfolios.
• The traditional venture model may be strained by the trend of increasing fund sizes.

"You can't put that many of those companies in a portfolio. Right. And that kind of breaks the venture model." "Well, I mean, it goes right in line with people raising bigger and bigger funds these days, too."

The quotes highlight the tension between the venture capital model and the reality of funding capital-intensive companies. As fund sizes increase, it becomes more difficult to accommodate these types of investments without altering the traditional venture model.

• SoftBank's acquisition of ARM for $32 billion demonstrates the company's significant investment in the semiconductor space.
• ARM's business model, similar to Qualcomm's, does not include manufacturing but focuses on reference designs for CPU chipsets.
• The acquisition price was considered a small portion of the Vision Fund's capital.

"SoftBank acquired Arm for $32 billion." "It's a pittance, small potatoes, right?" "Only a third of the fund."

These quotes discuss the acquisition of ARM by SoftBank and the relative scale of the investment in comparison to the size of SoftBank's Vision Fund. The discussion contextualizes the acquisition within the broader investment strategy of SoftBank.

• Standards in technology can lead to network effects, as seen with ARM, Intel, and Qualcomm.
• ARM's instruction set becomes more valuable as more devices and software adopt it, creating a self-reinforcing cycle.
• This dynamic is not exclusive to software but is also present in capital-intensive hardware industries.

"That actually is also a network effect game, just like CDMA and Qualcomm, where as more chipsets are built using that instruction set, the Arm instruction set, and more operating systems and apps run on them, then that's going to lead to more phones and devices with that chipset getting built, that's going to lead to more software getting written for those chipsets, and then that's going to create the network effect."

The quote explains how ARM's business model creates network effects similar to those in the software industry, emphasizing the value of widespread adoption of a standard in the hardware space.

• Low interest rates may facilitate more mergers and acquisitions due to the accessibility of debt financing.
• The current leverage in deals is not as extreme as seen before the 2008 financial crisis.
• The semiconductor industry is experiencing consolidation, which could be influenced by the macroeconomic environment.

"Are we seeing deals like this that are so highly leveraged and companies carrying so much debt and companies able to use debt to buy other companies because interest rates are so low."

The quote raises a question about the influence of low interest rates on the frequency and structure of mergers and acquisitions, suggesting that the cost of debt could be a factor in the consolidation of companies.

• There is an expectation of continued consolidation in the semiconductor industry, with companies either merging or being acquired.
• The discussion includes the potential outcomes and strategic moves if the companies do not merge.
• The narrative around industry consolidation is likened to the historical breakup and reformation of the "baby bells."

"There's going to be consolidation. Like, there's already deals lined up and they're trying to do other deals before those deals close. Like, if these companies don't merge with each other, then we're just going to see they'll probably end up the same company later through some crazy path of consolidation."

The quote reflects the inevitability of consolidation in the semiconductor industry, suggesting that even if immediate mergers do not occur, the companies are likely to combine eventually through various strategic transactions.

• The hosts consider the Broadcom offer for Qualcomm and its potential outcomes.
• They speculate on a possible increase in the offer price and the likelihood of regulatory approval.
• The deal's evaluation includes considerations of market dominance and the impact on shareholders.

"We'll evaluate this as the deal goes through and assume, which is a big leap, that it'll pass through regulatory approval."

The quote captures the hosts' approach to assessing the Broadcom-Qualcomm deal, acknowledging the uncertainty surrounding regulatory approval and its significance in the evaluation process.

• There is speculation about whether large tech companies like Apple, Google, and Facebook will continue to vertically integrate, potentially eliminating the need for some semiconductor companies.
• The discussion touches on the sustainability of companies in the face of such integration efforts by tech giants.
• The potential anti-competitive nature of the Broadcom-Qualcomm deal and its regulatory implications are considered.

"In the far future, do we think the company exists? Or do we think that apple and Google and Facebook just keep working to vertically integrate and start cutting out one piece of their offering at once, all the way until they're the most commoditized and then gone?"

This quote reflects the uncertainty about the long-term viability of semiconductor companies in an industry where large tech companies may choose to internalize functions that were previously outsourced.

• Crusoe provides a clean compute cloud for AI workloads, partnering with Nvidia.
• The company's data centers use wasted, stranded, or clean energy, offering cost and environmental benefits.
• Crusoe's unique positioning allows for better performance per dollar compared to traditional cloud providers.

"Because Crusoe's cloud is purpose built for AI and run on wasted, stranded or clean energy, they can provide significantly better performance per dollar than traditional cloud providers."

The quote highlights Crusoe's competitive advantage in the AI cloud computing market, emphasizing the efficiency and environmental benefits derived from their use of alternative energy sources.

• The hosts share personal recommendations, including a furniture store and a historical website.
• They discuss the unique finds at Big Daddy's Antiques and the fascinating history of Niagara Falls' dewatering in 1969.
• The conversation includes musings on the physical locations of servers hosting old websites and the potential for exploration.

"My carve out is a super random corner of the Internet. It is a front page website that has not been updated in at least a decade that got linked to from hacker news last week."

The quote introduces a personal recommendation that leads to a broader discussion on the longevity and discovery of old internet content, highlighting the hosts' curiosity and engagement with historical and quirky topics outside of their main discussion on technology and investments.