ISG Insights

Broadcom, Qualcomm, and Enterprise IT Uncertainty

What is Happening?

The potential Broadcom acquisition of Qualcomm, announced Monday last week, continues to surface in our conversations with clients. The conversations tend to focus more on the potential impacts on mobile devices and networking, but the disruptive effects will also reach deeply into the typical enterprise and services provider data centers.

To recap: Global chipmaker Broadcom Limited last week announced that it has offered to acquire wireless chip and device maker Qualcomm – which owns much of the intellectual property (IP) used in today’s mobile devices, especially smartphones. Patent licensing accounts for the bulk of Qualcomm’s revenue and profit. Broadcom’s initial offer is $70 per share in cash and stock, representing more than a 25 percent premium at market closing on November 2. The total value of the transaction would be more than $130B, making it by far the highest value ever for a tech company buyout.

Why is it Happening?

Broadcom is pursuing Qualcomm to build and grow a dominant, global provider of processor design, development, application, and IP. The technologies and patents associated with both Broadcom and Qualcomm are going to be used in an increasingly wide and integrative fashion, especially in mobile-first markets and situations. The acquisition of Qualcomm would make Broadcom one of the top three chipmakers in the world, behind only Intel and Samsung. And the new entity would be the de facto primary provider of key components in billions of smartphones, as well as billions more devices in use or in development that enable and improve digital workspaces and the Internet of Things (IoT). These latter uses are important factors driving this acquisition from Broadcom.

Looking below the surface of the combined entity is where we expect even more disruption, including within and between enterprise data centers. Broadcom, for example, is not only a major player in Wi-Fi, Android, and virtual private networking – it is also a strategic provider of processors and associated hardware to enterprise and provider data center vendors Dell and HPE, as well as networking suppliers Cisco Systems and Juniper Networks — and is working to close its recent $5.6B acquisition of Brocade Networks. Meanwhile, Qualcomm is in the process of trying to close its own $47B deal with chipmaker NXP – a leader in near-field communications (NFC) used for such wireless data transfer applications as mobile payments.

Net Impact

With this acquisition, Broadcom could extend reliance upon its hardware, IP, and architecture from the data center through enterprise and carrier networks to billions of end devices, potentially creating the largest and most vertically-integrated chip provider, with more influence on enterprise and services provider IT architecture than any other provider except, perhaps, Intel.

While regulatory approval of the acquisition as proposed seems unlikely today, a firm with Broadcom’s global M&A savvy is unlikely to announce and pursue such a deal without some reasonable expectation of a positive outcome. But it is the uncertainties surrounding and created by the potential deal that create disruption for enterprises and services providers. We expect uncertainty effects from the announcement will be felt everywhere. Key effects to be aware of and plan for include the following:

  • Partnerships. The potential of a combined Broadcom-Qualcomm will drive major efforts by chipmakers, networking hardware and services providers, server makers, and others to improve and expand relationships, both in attempts to counter the potential power and influence that would result from the Broadcom deal, and in attempts to secure predictable revenue in the face of a looming new Master Brand competitor. Look for more partner spending, more partnerships, and more acquisitions, by the IT providers most directly affected and wishing to strengthen themselves. This will engender disruption in enterprise IT procurement and sourcing.
  • Channels. Likewise, technology and services providers will be investing more to improve and extend channel partner relationships and revenues. But the channel members will also be investing in more relationships to mitigate business uncertainty driven by change and disruption among their Master Brand providers. Better channel relationships lead to better revenue streams. Look for some disruption among VARs especially – but also look for more willingness to negotiate on more deals.
  • Provider distress. Should the deal take place in a form similar to the announcement, the result would be somewhere near $100B in debt for Broadcom. Even with the networking and device growth being experienced and forecasted, it’s still seen as somewhat threatening. Along with typical cuts in sales and support resources, investments in such areas as R&D would no doubt be cut to reduce debt and return Broadcom to profitability ASAP. Product and service innovation – something that Qualcomm has invested in consistently on its own and with partners and customers – would likely slow or even decline. This would cascade through the value chain to affect channel and partner development and offerings, and their abilities to deliver and support customers. Review IT sourcing and procurement, including preferred and approved provider/vendor lists, to mitigate potential disruption by provider/vendor distress.
  • IoT and Smart Cities. Direct disruption of, and influence in, IoT and Smart Cities initiatives could be more muted. Broadcom sold off its IoT-related assets to Cypress Networks in 2016, including its offerings and intellectual property for Bluetooth, Wi-Fi, and ZigBee consumer IoT connectivity, as well as its Wireless Internet Connectivity for Embedded Devices (WICED) platform and SDK. Even so, uncertainty regarding backbone and wireless connectivity technologies, IP, and services could engender uncertainty among IoT and Smart Cities planners and providers. It may also disrupt enterprise IoT initiatives; review potential sourcing and supply chain/provider issues with IoT partner providers.

ISG Research will continue to monitor and analyze the situation as it unfolds over the coming weeks and months. Clients of ISG Insights will see a series of Research Notes and Lens360 blog posts concerning market effects and enterprise planning and management.

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