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Why Broadcom Buying Qualcomm Isn’t as Crazy as it Seems

November 3, 2017, 11:03 PM UTC

Broadcom CEO Hock Tan has been disrupting the semiconductor industry for decades, but he’s obviously not finished yet. The serial consolidator has reportedly set his sights on buying mobile chip giant Qualcomm for $100 billion, in what would create one of the largest chipmakers in the world.

There are plenty of skeptics. Broadcom hasn’t even won approval for a pending $6 billion acquisition of Brocade (BRCD), initially announced last November. And Qualcomm is in the middle of a year-long effort to buy NXP Semiconductors for $39 billion, while also engaging in a massive, global legal battle with Apple, its best customer.

Qualcomm’s shares jumped 13% on Friday to almost $62, still well below the rumored offer price. Broadcom shares gained 5%.

Those who bet against the Malaysian-born CEO, trained at MIT and Harvard, often find themselves on the wrong end of the deal when the dust has settled. In an industry filled with brilliant engineers like Nvidia CEO Jensen Huang and Advanced Micro Device’s Lisa Su, Tan is the finance geek who can manage a balance sheet as a powerfully as he can create a new technology product.

And Tan has experience swallowing bigger fish. After building Avago Technologies into a medium-sized chipmaker, his $37 billion buyout of Broadcom (AVGO) in 2015 created a world-class titan, one of the world’s largest chipmaker (which retained the Broadcom name), with products for wireless communications, smartphones, data center servers and many more markets. Qualcomm is, of course, even bigger-with $22 billion of annual sales versus Broadcom’s $18 billion. The combination would rank third i the world by revenue.

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Tan climbed the ladder in corporate finance at GM and Pepsico before first getting involved with tech at early PC maker Commodore in 1992. Two years later, he jumped to chipmaker Integrated Circuit Systems as CFO where he eventually rose to CEO and started his acquisition spree. And his dealmaking prowess has led to relationships with top private equity firms including KKR and Silver Lake. If anyone can raise $100 billion to complete the biggest tech deal ever, it’s probably Tan.

That’s not to say Tan doesn’t know semiconductors. AMD’s Su, who has three degrees from MIT, likes to joke that her industry should have more Harvard MBAs reporting to MIT Phds. Tan almost has both, with a masters in mechanical engineering from MIT to go along with his Harvard MBA.

Known as a ruthless cost cutter, Tan’s approach has been to gut pie-in-the-sky research projects and focus on the most promising tech developments. He also favors business units that fit together. After merging Avago and Broadcom, for example, he dumped a burgeoning Internet of things unit that made chips that could be used in smart devices for homes and businesses. Most of Broadcom’s chips went to huge customers like Apple and Cisco Systems. The Internet of things unit was pitching to hundreds of medium and small-sized hardware developers, a model that wouldn’t scale well with the rest of Broadcom.

Qualcomm, a company founded and run by engineers, could probably use a thorough going over by Hock and his green eyeshade crew. With growth in the global smartphone market slowing, the company has attacked all manner of new markets, developing everything from laptops that can run Windows using chips that don’t rely on Intel designs to a whole new breed of central processors for self-driving cars. Some of Qualcomm’s problems with Apple seem to be of its own making since the company cut off rebate payments and stopped providing testing software. And antitrust regulators around the world are putting the squeeze on Qualcomm’s high royalty rates that bring in billions in profits from smartphone makers.

Qualcomm’s stock was previously over $80 in 2014. Since then, it fell almost 40% until Friday’s rumored deal sparked a huge rally

Wall Street may not believe yet, but a dose of Tan’s financial brilliance may be just what Qualcomm needs to get back on track.

(Update: This story was updated on November 6 to correct that Broadcom is one of the world’s largest chipmakers but not third-largest. Buying Qualcomm would make it third-largest.)