Qualcomm - Broadcom

00:00Are you drinking whiskey? No, tea. I was like, that's a big cup of whiskey. Welcome back to episode 48 of Acquired, the podcast about technology acquisitions and IPOs. I'm Ben Gilbert. I'm David Rosenthal. And we are your hosts. Today, we are covering what would be the biggest tech acquisition of all time, Broadcom acquiring Qualcomm. And as we record, the current status of the deal was it was rejected today for a price of $103 billion, not including the, or I guess accounting for the debt that is part of the deal. And it'll be really fascinating to see how this unfolds in front of us, David. Yeah, the battle of the comms. Yeah, 1M versus 2, who will win? Reminds me of 3Com. Yes. It's incredibly, incredibly creative names in this industry. Yeah. Well, I think one of the themes we'll get into today is what's old is new again. So, you know, it's like we're back in the year 2001 here.

01:13Okay. So for listeners who are maybe not as deep in semiconductor companies and wondering sort of what these companies do, 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, with the exception of maybe Intel, Samsung, TSMC, most of the chip designers are not actually the chip manufacturers because it's so expensive to create them. So both of these companies design and then work with contract manufacturing partners to manufacture the chips that go inside your phone and other computing devices. And they make everything from the actual processors themselves to wireless radios. And we'll get into that more in the show. But it's basically component makers for phones, computers, servers, etc. And your car, your toaster, your everything these days. That's right.

02:11IoT explosion. Well, before we get too much into it, a couple of quick reminders. 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, go to acquire.fm. You can join in the sidebar or on mobile down at the bottom. The other thing is we love reviews. So if you like the show and you think other people would like it too, pause the show right now. You can always come back to it and go leave a quick review on Apple Podcasts. And you can do that through, I think, through the iTunes store. All right, listeners, now is a great time to tell you about longtime friend of the show, Vanta. So, David, I want to paint a picture that many founders listening will recognize. You're about to close your biggest customer yet. The product team has hit a bunch of milestones.

03:05The sales team built this fantastic relationship. Everyone at the potential customer is fired up. Your legal team has the contract done. But then an email comes in from the security team. Ah, yes. It's usually a very polite email asking something like, before proceeding, could you share your SOC 2 report? Or do you mind sharing your ISO 27001? If you don't have one, that deal just went from closing this month to closing next quarter, maybe. Now you have to go find an auditor, go through every system, write the policies, and then prove that you follow them. Right. Or you could just use Vanta. They are the leading agentic trust platform, which means that you can connect it to your systems at your company, and it automatically pulls all the relevant data, and it tells you exactly what's missing for a SOC 2 and ISO 27001, or whichever framework your customer asked for.

03:59Vanta gets you through the audit, and then it keeps going. It watches your controls every day afterwards, so the report that you hand to the next customer is still true. Yep, and even more impressive is the Vanta agent. It continues to run in the background so it can find the issues and draft the fixes. This is the work that eats weeks of an engineer's time before an audit. And now it mostly just gets done before anyone has to ask. And the results are super impressive. A recent industry report says that Vantus customers see a 526% return over three years and that it pays for itself within the first three months. If you've ever had one of these security emails stall a deal, you know exactly how that math works. More than 16,000 companies now run on Vanta. 16,000. Listeners, there were 2,000 when David and I started working with Vanta. That's incredible what they've accomplished.

04:51And these are companies from large enterprises like Atlassian and Snowflake to the New Guard, like Ramp and Cursor. We've been fans of Vanta for years. And hundreds, like literally hundreds, maybe even at this point thousands of acquired listeners have become Vanta customers over that time. If you want $1,000 off, check out Vanta.com slash acquired. That's V-A-N-T-A dot com slash acquired. And just tell them that Ben and David sent you. All right. And with that, David, are you ready to take us in? Yeah. But before we get into history and facts today, I think there's some stage setting that'll probably come back in tech themes, but I want to do up front. We were joking a minute ago about what's old being new again in Silicon Valley right now. And the old that is new is the silicon in Silicon Valley.

05:42There's obviously this deal, which is potentially going through largest technology acquisition of all time, Broadcom buying Qualcomm. But that's far from the only thing happening in the semiconductor world right now. Well, and hilariously, Silicon Valley, I mean, the genesis and innovation of semiconductors is in Silicon Valley. you know, the area south of San Francisco around San Jose, but Singapore based Broadcom and San Diego based Qualcomm are neither. Nope. Nope. Indeed. There's just a lot going on in true Silicon Valley and in the rest of the world, Silicon Valley and spirit. So I thought maybe we'd review just a couple of things. And this might be depending on how you guys like this, maybe this will become another theme that we dig into here at Acquired, which is what's going on in the semiconductor world to go with our sort of mini series that we have on travel and um and

06:37sports and other other things but uh it all started uh really a couple years ago as with many things with the sort of boom in machine learning if we could look at a company called nvidia which is another another chip maker and for a long time they've made just graphics cards for pcs and video game consoles and workstations. And so if you were a gamer, you definitely knew what NVIDIA was and maybe you own some of their stock. But then with GPUs over the last couple of years becoming so prevalent in machine learning, NVIDIA has basically been on this crazy tear. So if you go back to 2015, they were trading at $20 a share. You and I did the same math to prepare for this episode. I have January of 2016 at $26 a share. Yeah. This is, you know, we don't compare notes before we start here. We're keeping the conversation real.

07:33So two years ago, NVIDIA is at $20 a share. Today, it's at $212 a share. So that's over a 10x in two years. I mean, this is like VCs would kill to have that kind of markup. And this is in the public markets. It turns out, you know, graphics cards are good for more than just graphics. Who knew? linear algebra, matrix transforms, you know, really good for, for, uh, games and for rendering. And it just so happens for the core technology. That's a piece of every new technology now, machine learning. Yep. Yep. So we've got Nvidia, which is on fire, uh, in a good way. You've got a company called Nirvana, which was a, another GPU and machine learning kind of dedicated chip manufacturer chip designer that was a startup that was acquired by intel uh for 350 million dollars and that was kind of in many ways I think the um uh the start of a renaissance in in terms

08:32of actual startups getting started in the in the semiconductor world which hadn't happened in a long time um so just this week uh sequoia led a 50 million dollar round in a company called graph core out of the uk which also makes uh specialized chips for for machine learning and deep learning applications. And what's crazy, this company has been around for only about a year. Sequoia just invested $50 million. They had already raised $60 million. So this company has raised $110 million in just over a year to compete in what's a very crowded market now of lots of startups going out there trying to compete with NVIDIA, make specialized machine learning chips. It's worth pausing for a moment here. What's enabled that innovation? I mean, aside from the market demand for new types of computing with machine learning, the need for just a few companies to consolidate

09:27and have most of the fabs in the silicon industry made sense. You know, it's been around for a while, I don't know, 10, 20, 30 years. And that happened because as we shrunk the number of nanometers that were necessary or that we could put on a wafer, not being very eloquent there, but basically as we got more more sophisticated at putting more and more transistors on a given wafer, it became more and more expensive to produce the ability to manufacture those. So only a few companies are actually doing the manufacturing because it costs 10 billion plus dollars to create one of these fabs. 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. It actually reminds me, it's funny, we're doing

10:16tech themes before we even talk history, but it reminds me a lot of Jeff Bezos talking about how Amazon wouldn't be possible if it weren't for the electric grid and for UPS and for the internet and for everyone, the phone companies before the internet, everyone that came before to basically build platforms that you could do innovation on top of. Yep. Yes, I would say yes. But what's interesting about this class of startups is they kind of fall somewhere between the amount of capital that you used to need to create a semiconductor company when you were fabbing the chips and a software company in that, as we're seeing with this company Graphcore, they're raising a ton of money. And I think that's because you need so many engineers and so much just technology investment going into working on these chip designs. I mean,

11:03these things are so massively complex that it just takes a ton of investment into them. Um, and, and then that's also not to mention sales investment, right? Because there's so many companies out there now competing for this, this segment, you've got the machine learning, you know, sort of craze going on and, and all of the growth that's being chased by lots of startups and big companies there in one corner of the market. Then Ben, as you mentioned in another corner of the market, you have the fabs themselves. So that's TSMC, uh, which I believe is the biggest. and then Samsung and Intel are the major fabs out there in the world. And TSMC is over a $200 billion market cap company. And as you said, this is just pure commodity production of designs that other people are making and including many of these machine learning driven companies. So that's

11:56in another corner of the market. And those companies are growing as all this demand is coming online for chips that they're producing. And then you've got this third corner of the market. And that's what we're going to explore today. And these are kind of in many ways, legacy, large chip designers that really had had a big run up over the last 10 years as the mobile era got installed. You know, both of these companies, Broadcom and Qualcomm specifically, were making tons of chips that were going into just about every mobile phone out there. But what's happened is that you have Apple, which has started to bring a lot of their chip design in house, as we talked about on the PA semi and authentic episode, um, to the point where I believe almost pretty much almost every chip within an iPhone and an iPad is, is Apple designed in

12:46house at this point. Ah, no, it is not. No. Oh, interesting. This is a good, I'll take a little segue here because I, uh, um, as I was trying to understand myself exactly what is Qualcomm and what is Broadcom, I went and looked at the basically bill of materials and the teardowns for each of the iPhone X and the Pixel 2 XL. And it is actually pretty surprising how many components are made by these companies that are in not only Android phones, but iPhones. And so while we all know that Apple creates their own design for the A11 processor or the whole A series processors, the motion coprocessor, the, I think they have their own audio, the digital signal processor now. So Apple's designing all these things and they're having them contract manufactured by TSMC and Samsung. There's actually plenty of Qualcomm and Broadcom components in the

13:38iPhone. So inside the iPhone 10, Qualcomm makes the gigabit LTE transceiver. They also make the LTE modem, which is actually part of the Snapdragon series. And Apple dual sources this between Intel and Qualcomm. So they sort of switch off, which some batches of phones get an Intel, some get the Qualcomm. The iPhone X has Broadcom chips for wireless charging, for the power amplifier module, and for the touchscreen controller. So all those things are Broadcom. And in the Pixel 2 XL, which is actually manufactured by LG, and the HTC one is just the Pixel 2, Qualcomm makes a variety of components. They make the Snapdragon processor, which is the sort of counterpart to Apple's A11 Bionic chip. Qualcomm makes the gigabit LTE RF transceiver, the power management integrated circuit, the quick charge integrated circuit. And interestingly enough, I don't think

14:36there's any Broadcom components in the Pixel 2 XL, at least not that could be identified by people that are ripping the phone apart. So the bottom line here is the iPhone 10 and the Pixel 2 XL both have a ton of Qualcomm and Broadcom parts in them. And I think the only major area where they don't compete is actually on the sort of main CPU itself. They compete on all the radios and all the Bluetooth and the Wi-Fi and all that stuff. Interesting. Interesting. Well, it goes to show how complicated this space is. Yeah. Everybody is a frenemy. Everybody is a competitor. Everybody is in coopetition. Yeah. And even just the sheer number of chips in these devices is crazy. All right, listeners, now is a great time to thank our longtime friend of the show, ServiceNow. So David, here's a question that I do not think most enterprise CIOs or CEOs

15:29could actually answer today if they were asked. How many agents actually run inside your business? Yes, I don't think anybody really knows. And of course, then there's the harder questions like, what can they access and who gave them that access? And is any of this paying for itself? ServiceNow has an answer to all those questions. The super intelligence control tower. As friend of the show, CEO Bill McDermott says, it's the one place to see, secure, measure, and help govern your agents' models and workflows across your entire business, no matter who built it. Yep. So for example, it finds the agent that someone in procurement spun up on their own and then tracks what it's doing and its ongoing cost. When the CFO inevitably asks whether any of this is working and if there's ROI, you'll be ready with the number. And importantly, if something goes wrong,

16:25it can detect and revoke access immediately. There's even a kill switch built into the product. And ServiceNow is uniquely positioned for this because they've spent the last 20 years building the operating backbone of the enterprise from IT to HR, sales, service, and cybersecurity. They know how work gets done, helping support over 100 billion workflows a year across more than 90% of the Fortune 500. The world's most complicated businesses, like many that we've covered here on Acquired, already run on ServiceNow. And now they're running their AI there too. If you're trying to turn AI ambition into real outcomes, just go to servicenow.com slash acquired and just tell them that Ben and David sent you. Okay, let's get into Qualcomm and Broadcom a little bit. both companies are at this point sort of franken companies as we were joking before the show of

17:19having done so much M&A over the years that it's hard to even untangle the rat's nest and go back and figure out where they originated. 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. They took the Broadcom name. And Avago started life itself way back in the day as HP's semiconductor division. It's then been through a bunch of divestitures and mergers over the years and ended up here. But it goes really back to the origin of Silicon Valley with Hewlett-Packard in the garage. Yeah, it's fascinating to think about what would have happened if they hadn't spun that out. That could be sort of a fun episode to do at some point, but you know, what if, what if HP was

18:11the largest smartphone component manufacturer? Yeah. Uh, well, they might be in a better place than they are now, but that's for another episode. Um, but Qualcomm will spend a little more time on this, uh, cause I think this is such a fun story. So Qualcomm, uh, 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. And it actually was, and this is what I think is fun about it, it was actually like an OG network effect company. And the network effect that Qualcomm was started around, even though it became a semiconductor company was the original network effect of the telephone. And what I mean by that is if you go back and think about kind of the Bell Telephone Company

19:09and the idea of, you know, as you add more participants to the network of people who have telephones and are connected, then the more valuable the network becomes as you as you add more people and the more defensible it becomes. Well, Qualcomm actually sort of stumbled into doing the same thing with cellular telephones. And so we all remember, or many of us remember, there were sort of the carrier standard wars that were happening over the decade of the 2000s and most of the 2010s of GSM versus CMA. We went with singular specifically because my dad was looking into this and decided that he wanted to make a bet on GSM.

19:50The GSM was the future. And I think something about the GSM architecture made it so you could have, there were fewer towers right now, but they had a wider range. So it was the safe bet for the future that when they put more of them out, they're going to be more efficient. And we're still with AT&T to this day, post-Singular AT&T merger for that reason. Yep. And so Singular and AT&T were with the GSM standard, as was T-Mobile in the US and Verizon and Sprint were CDMA and they were incompatible with one another. This was like the HD DVD and Blu-ray of the mobile telephone world. And consumers trying to understand that as a complete nightmare. Oh, complete nightmare. Well, and to make it even more of a nightmare, though, the actual underlying technology behind these standards was all CDMA. And Qualcomm commercialized.

20:43They didn't invent the technology of CDMA, but they were the first to commercialize the application of this to the cell phone world of code division multiple access. And what that technology did, it was a standard that allowed for communication and multiple access, the MA stands for, allowed for the communication of many, many different private channels over one wavelength or one frequency in the airwaves. And so that's how when you have however many millions of people all on a cellular network and they all have their own data that they're streaming and calls that they're on and text messages that they're doing, but it's all going over the same airwaves. That's how it's all divided and everybody has their own private channel.

21:29And the technology to do that was invented by Qualcomm. And so they started putting it into cell phone base stations. And then they started making handsets and chipsets for handsets, cell phone handsets that went with it. And then the more base stations that got out there that operated on this technology, then the more handsets that were put on that could take advantage of those base stations. And then it just turned into this virtuous cycle and became a network effect. And so even though there were these two different flavors of it with GSM and official CDMA, it was all based on the underlying Qualcomm technology. And Qualcomm was making money from licensing from all of it. even if we flash forward now looking at their licensing revenues, I think a lot of these come from patents. And I'm sure we'll get into that. But it's something like maybe a third of Qualcomm's

22:23revenue is from licensing deals. I think I can get the actual number here. Yeah, Qualcomm's 10K last year was $15.4 billion in revenue from equipment and services and $8 billion from licensing. And a lot of that, I think, goes back to this underlying technology that they're licensing out that's in just about every cell phone radio out there, base station. How do we get from there? This is in the mid-90s through late 90s all the way through the 2000s that they're focusing on this. How do we get from there to where we are today with Broadcom? Well, first they were making the base stations, and Qualcomm was, and then they started making phones. So I remember actually having Qualcomm cell phones, Qualcomm branded cell phones back in the day when I was in middle school, dating myself there. And then they end up selling that business and they go into making chipsets that go into the phones.

23:17They sold the handset business to Kyocera. I remember also having Kyocera based phones. And so they go into making chipsets. And this is, you know, when they get into like the Snapdragon processors that get branded that people hear about. but then over the past few years as the phone market has gotten really saturated and and a lot of the processors especially the non-processors that aren't designed the chips that aren't designed by the apples and samsung's themselves start to become more commoditized that's when we start to see consolidation happening in this space this is when the broadcom and evago deal happened last year and now broadcom is coming in and attempting to buy qualcomm to further consolidate yeah and And one quick note, I want to rewind earlier where I said Broadcom doesn't make actual CPUs. They do make CPUs.

24:05The thing I was thinking of is I don't believe that Broadcom makes LTE antennas. They just make the chips that are Bluetooth and Wi-Fi and all that. First of all, I didn't know that Qualcomm ever made a phone. We're going to have to, I don't know, dig up one of those or something. Okay, so here we are. There's all this consolidation going on right now. One of my tech themes was actually that we're in this era now where this stuff has gotten so commoditized and gotten pushed down so far in price that we need to see consolidation because the R&D costs to be a chip manufacturer are enormous. The manufacturing costs are enormous. The cycle to create the next new model is long and expensive.

24:50So, I mean, these companies, in order to really compete with the vertical integrators themselves, with the handset manufacturers, have to combine because they want to take advantage of combining their R&D costs, their manufacturing costs, all that, and basically bundle those together and then bundle their products when they're selling them to the handset manufacturers so they can say, look, we'll give you, instead of buying from two different companies, you're buying from one. So we'll cut you a deal. We'll sell you all the internals to this phone. And they're really just feeling a lot of pressure by the handset manufacturers starting to take on some of this on their own where they need to preserve their margins by combining. Yeah. I mean, this is really, you know, I think this is one of the first times on this show, maybe other than

25:36the Alaska Virgin episode where we've seen, you know, economies of scale, like actually be a thing because in software, it usually doesn't work that way. Right, right. It so happens that this is so expensive to produce and so expensive to develop that it actually makes sense. Yep. Obviously, we've glossed over a lot there in the history and facts, but in an effort to keep this episode under three hours. I'm going to, yeah, yeah. There's a couple things on history and facts that I want to pull out before we go into acquisition category. So one of them is that this deal, so we said it was rejected, $103 billion deal, not including the assumed debt. I think it's $130 billion purchase price, including the debt. It's a $70 per share in cash and stock. I'll make a prediction that this deal will go through at some point, somewhere slightly higher than this.

26:28So let's say it's at $80 per share in cash and stock. Let's evaluate the rest of this episode on that basis, that it actually does go through, that it gets the regulatory approval, which is another thing we should talk about, and that it's around that price. It's interesting to know all the other things going on with these companies right now that are shaping the environment of why their share prices are where they are, why there are external pressures. There's lawsuits going on. The FTC is currently suing Qualcomm. Apple is currently embroiled in a lawsuit with Qualcomm. Their share price is depressed right now because of these external factors going on. So if I'm Broadcom, what I'm seeing here is, boy, there's an opportunity to get a great company for pretty cheap because they're going through this sort of rocky time. They'll pull out of it. Their stock price will rebound. But hey,

27:17they were trading at $70 a share a year ago. Now they're trading below that. We can pretend it's a little bit of a premium now and try and buy them at that again when their intrinsic value is actually probably higher. So we're definitely seeing Broadcom being opportunistic from a timeframe perspective right now. And then the other thing on top of that is that Silver Lake Partners, a private equity firm, and actually the private equity firm that owns Skype and sold that to Microsoft, which we covered on the Skype episode of the show. Along with Andreessen Horowitz as a small piece. That's right. They committed $5 billion in convertible debt to finance this acquisition for Broadcom. And the Broadcom offer is cash and stock, where it's a $10 of stock and $60 of cash per share for this. So it's interesting to sort of look at the structure of the deal a

28:09little bit and sort of the environmental factors around it. And I think it's probably the right move for Qualcomm to reject it for this price because they're seeing the same thing, that that Broadcom is just being opportunistic and not really being willing, at least at the first go around here, to pay for what the company is really worth. That brings up another point that is a key difference in the semiconductor corner of the tech world versus much of the software world, which is that these companies all have significant debt on them. So they're levered. And you're seeing a lot of structure, as you pointed out. I mean, Silver Lake's involved here, using convertible debt to help finance the acquisition. This is not typically how things get done in the software world where Facebook buys you for stock.

29:01And just to add even more hair to the deal on both sides, Broadcom is currently acquiring Brocade, I think that's how you say it, for $5 billion. I have another comment on that in a minute. Qualcomm is in the midst of acquiring NXP semiconductors for $47 billion. The offer from Broadcom to buy Qualcomm was not contingent upon either of these things closing, which is interesting in its own right. If Broadcom does buy Qualcomm, what does that mean? Does the NXP deal go away? Do they try and continue doing that even as a combined entity? Will that go through regulatory approval, who knows. And then on top of all this, here's the super interesting thing. So Broadcom proposed merging with Brocade, and they're going through this acquisition. It was delayed for review because of the Committee on Foreign Investment in the United States.

29:56And to circumvent this, Broadcom, or I actually don't believe it's explicitly been said that that's what this is for, but 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. And you can imagine how this was sort of highly, highly intertwined with all of the United States' recent politics and buddying up to the Trump administration from the Broadcom side. Let's just add the most complex structure possible on top of this deal to add a bunch of external complicating factors. Yeah. I mean, I think one thing we can say about this whole industry, as Ben and I started to dive into it today is that it is massively complex and there is so much drama going on for, you know, what most of tech is just thought of as like a relatively sleepy, stable corner of the

30:47industry. There is massive change happening. Absolutely right. All right, listeners, now is a great time to talk about one of our favorite companies, Legora, the agentic operating system for legal work. Yes. Most of you have dropped a contract into a chatbot by now, But as a lawyer, how far can that really take you? It's never seen your firm's precedents. It doesn't respect confidentiality. And you can't check where its answer came from. So Lagora's founders approached this the way that great founders do. Early on, the team moved into the office of a big law firm in Stockholm and learned, for months, how the work actually gets done. A couple of thousands of enterprise customers and 100,000 users later, they still work that way. They employ 100 legal engineers on staff.

31:36These are lawyers sitting inside of firms and legal departments to deploy Lagora onto live situations like the deal closing this week or the policy review due Friday. The product has gotten very powerful in a short period of time. A year ago, the goal was a good answer from a chatbot. With the Legora agent, you hand it the work and it comes back with a plan. Tasks like running diligence on a data room or reviewing a new vendor contract get completed inside the tool you use every day, like Microsoft Word, and against your own precedents and playbooks. Every finding is sourced, the lawyer directs the work and signs off before the system executes any steps. Every legal team can get access to the same AI models, so the models themselves do not give you an edge. What you can do with your own data, people, playbooks, that's the whole game.

32:26Today, over 100,000 legal professionals at more than 1,800 law firms and in-house legal teams in over 50 markets use Lagora. And when Lagora goes head-to-head with its top competitor in a pilot, it wins 70% of the time. A demo is one thing, but what matters most is an associate who reaches for it at two in the morning during a closing or whether a general counsel trusts what it says before the board meeting. So if your legal team wants to check it out, whether you're at a firm or in-house, go to lagora.com slash acquired and be sure to tell them that Ben and David sent you. Let's go into acquisition category. So David, where are you on that?

33:05Yeah. So I'm going to go with, and as a reminder to the audience, we have people, technology, product, business line, asset, and other. I'm going to go with other here and just say this is consolidation. I mean, literally, these companies make the same commodity chipsets. and uh like they're not buying new product lines they're not buying differentiated technologies um you know there's no as as you pointed out they're not uh they're not fabs themselves so they're not buying you know fab capacity um they're they're literally just buying consolidation within uh the the existing sales channels that they're going through yeah it's it's it's buying themselves more supplier power against their their combined customers and and trying to reduce uh reduce cost to preserve margin. And as you said that, I'm nodding my head like, yes,

33:57you're exactly right. And I'm realizing somehow I don't think we've done a pure consolidation play on the show before. 48 episodes in and here we are coming up with a new acquisition category for ourselves that is like one of the textbook reasons why companies are merged or acquired. It's funny. I remember doing it on something. Did we do it on Virgin in Alaska? I think Zillow. We struggled to articulate exactly what was going on, but we were like, oh, you know, it's a marketplace where there's more of identical supply and more of identical demand. Yeah. I think we did call it consolidation there. To my mind, like it's pretty clear this is what's happening here, especially when you bring in, as we were talking about a minute ago, the whole economy is a scale factor here. Yep. Listeners, this is probably a good time to say

34:43neither David nor I have spent a ton of time doing the financial analysis on this this company because a few hours ago we decided to call an audible and we were going to do what we thought was going to be an exciting episode with Starwood and Marriott but as we were both digging into it we were texting each other and being like there's really actually nothing new or insightful here David said to me the episode is probably mostly going to be about Airbnb which we've covered many times before. So listeners know that we would rather dive into a meaty subject like this and maybe not have done all of our financial analysis like we would normally do at the alternative of doing what we thought would be a boring episode. So with that whole caveat, it is interesting to look out. One thing that I haven't fully wrapped my head around yet is why Broadcom is so much more

35:37valuable than Qualcomm. Because if you look at their profit margins are pretty similar. Qualcomm has 56% profit margins. Broadcom has 59% profit margins. If you look at their revenues last year, Broadcom did about, in 2016, $13.2 billion of total revenue. And Qualcomm did $23 billion of revenue. So I'm trying to suss out here exactly why Broadcom is the much more valuable company. It's got to be just something else that I haven't really considered yet. Growth rate or balance sheet or something like that. But, you know, you have two companies where it's just not totally clear to me that one of them is the super behemoth that is buying up the smaller one. It really does kind of feel like a combination of very, very similar competitors. Yeah, totally. I'm wondering if maybe it was, yeah, maybe balance sheet and maybe debt loads on these companies are different.

36:34But yeah, it does feel very much like a merger of equals here. Yeah, so here it is on Yahoo Finance. Probably because of the combination of Avago and Broadcom, their revenues in 2015 were at $6.8 billion and then spiked to $13.2 billion in 2016. So, you know, revenues grew tremendously. If you look over at Qualcomm, not only is it not a hyper growth company, the last three years from 2015 to 2016 to 2017 went from $25.2 billion to $23.5 billion to $22.2 billion. Revenues are actually declining for Qualcomm. Actually declining. Yeah. Well, that's a recipe for not getting a high multiple on your stack. Yep. To me, we don't have a super behemoth acquiring a much smaller player. we sort of have two competitors that are in a quite similar position. Yeah. But I mean, that also speaks to, I think, you know, the markets that these companies are

37:33in right now, the smartphone market is just so saturated. Like it's, it's not growing and, and prices are falling. Like volumes may be growing, but because these parts are commoditizing so fast, like prices are, prices are just falling faster than, than the volumes are picking up. Yep. Yep. And there's a great article by Stacey Higginbotham on Stacey on IoT, her blog or publication, talking about how when phone makers are vertically integrating, it means there's less room for the sort of horizontal providers of the components, because even though the markets are growing, there's now been a precedent set by Apple where when you become hugely successful, you can graduate away from the chip makers into doing it in-house.

38:16I frequently think about this at Pioneer Square Labs when we're starting businesses that look a lot like tools businesses, like, oh, well, if your customers, if you enable your customers to be too successful, will they start doing this in-house? And it's something that I think, David, you probably think about a lot in evaluating investment opportunities, too. But I don't think that until very recently, that characteristic existed in the silicon world. I think it was always, you know, this is an extremely difficult thing that's always done by horizontal providers. So you go to them for the expertise and only recently as that started sort of evaporating and people moving off the platform to do in-house.

38:51Well, it's interesting. As I was thinking about this deal too, that dynamic really only exists in the pure technology world, right? And what I mean by that is like the phone, the smartphone world, like and other devices that are clearly positioned, you know, built and sold by technology companies as technology devices. And I think that's probably one of the reasons why both of these companies are making Broadcom and Qualcomm are making such pushes in the quote unquote IoT world of, you know, putting chipsets into all sorts of other, you know, non-traditional technology devices, because those companies, you know, whether it's, I think this was also part of that same piece, this idea that like, you know, Whirlpool isn't going to start vertically integrating the chipsets in their, you know, jacuzzis or whatever.

39:44Or, you know, your toaster, whoever makes your toaster, isn't going to start designing their own chips. You watch. So they can probably... Yeah, you watch. Well, that's actually Apple's next growth market. It's going to come from a very different place where you believe. And actually, by the time this episode airs, we will have seen the highly, highly anticipated Elon Musk semi-truck. So, you know, I think don't get too excited about boring, old, undisrupted things, not having their own their own chips. Well, software is eating the world. So I think we've covered a lot of tech names here. But, you know, one that I've been sort of puzzling over and I was when we decided a couple hours ago we were going to cover this topic. I was really hoping to get an answer to and I haven't is so Sequoia on their old website.

40:33I think we've talked about this in the past, maybe about this very, very theme. They used to have like this whole list of sort of like lessons that they've learned over the years. And one of them pretty high on the list was this statement that capital intensity usually produces nightmares. And I'd always in my mind been trying to square that statement with the fact that so much of Sequoia's early success came from investing in semiconductor companies, which of course, we're talking about are like super capital intensive. And now Sequoia is back this week and they've invested in other semiconductors too, but back in the market, you know, and leading a $50 million round and a year old company that's already raised $60 million. I mean, if that's not capital intensity, I don't know what is. And, and so how do you square that? Because like I,

41:22on the one hand, I totally get the statement and I agree with it. Like you've got a very competitive market, then all these companies raising all this money, it's not going to end well for most people. I mean, you're seeing this in ride sharing, right? Like ride sharing became a capital intensive business. And so you have all of these companies all around the world raising all this money. Not all of them are going to win. In the semiconductor world at the same time, though, you do have this capital intensity that can produce good returns and certainly has for Broadcom and Avago and many other companies, TSMC and the other side of the market. I don't know. What do you think, Ben? I think there's a few things here. I think one, capital deployment into companies is not a perfectly efficient market. And it relies on people's access to deals

42:10and timing and emotions and getting swayed by trends. And I think we'd all like to imagine that we come up with an investment thesis and we just stick to it with incredible discipline. I think in practice, there are deals that come your way and you do them because they make sense in the time, even though they don't fit into the master thesis. And the plan is the plan until the plan changes. And I think, you know, it probably falls into that category. It also probably falls into the category of every single person at a firm not having the exact same thesis over a 20 year lens. And I think on top of that, there's going to be enormous winners in this space. And what better thing to do with venture money than put it in an incredibly high risk, high reward opportunity? I mean, these are $100 billion companies.

42:58And I think that if you can get something that even as a public stock like NVIDIA grows and 10X is like that, while they are fraught with danger and often don't end well in almost every case, the winners are huge. So 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. That's true. And maybe that's just you have to get good at really, really good at picking the winners because the danger here, right, is at least, you know, when we're talking about early stage companies, if you need to put one hundred and ten million dollars into a company that still

43:47has tons of tons of technology risk a year into its life, you just can't take that many. You can't put that many of those companies in a portfolio, right? Like 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. Yep. Well, and the one thing that we didn't talk about in the beginning of the episode about all the activity in the semiconductor space is, surprise, surprise, SoftBank is here too. So SoftBank acquired ARM a couple of years ago. This was before the Vision Fund, but if it had been after the Vision Fund existed, they probably would have put it in there too. um and uh yes a soft bank acquired arm for um 32 billion dollars um and uh it's a pittance small potatoes right only a third of the fund um and and I'm pretty sure they like

44:46buying arm doesn't mean you buy any manufacturing capability you're buying I think the rights to most of those designs and supply chain relationships I know they have a few different packages that they sell. But I believe it's actually probably very similar dynamics to Qualcomm where ARM, you know, was not a, not a fab, but they made the reference designs for, for CPU chip sets. And that actually is also a network effect game, just like CDMA and Qualcomm, where as more chip sets 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, you know, 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, you know, create the network

45:36effect. And I guess, you know, as I was thinking about this, the sort of one tech theme that I felt like I was able to pretty much land on in this show is this idea that standards can lead to network effects. I mean, we saw it with ARM, we saw it with Intel and the x86 chipset. We saw it with Qualcomm and CDMA. I've never really thought about that, that even in a very capital intensive, you know, hardware space, you also can have network effect dynamics. Yeah, it's pretty interesting. And I'm out of my league here, but you might be able to evaluate this better than me. But one other tech theme I was thinking about is, 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? And do interest rates being low

46:30from a macroeconomic sense spur more consolidation between gigantic companies like this because they can use debt for their acquisitions? That could be true, but it's nowhere near like what we saw before the financial crisis in 2008. I mean, some of those companies were levered like, you know, hugely. I remember looking at, you know, 5x leverage on these companies. And I don't think Qualcomm and Broadcom are that highly levered. It's probably more like, well, we can go back and do the math, but probably more like, you know, somewhere between one to three X levered. So I don't think we're quite at those heights yet, but certainly more so than in the software space. Cool. Thanks. Okay, so one thing we skipped is what would have happened otherwise. There's going to be consolidation. There's already deals lined up and they're trying to do other deals before those deals close.

47:27If 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 same way that the baby bells break up and reform. That's certainly what it seems like. Yep. Which is probably good to tee up for grading this. Yeah. So when we're thinking about grading this, Dave and I were talking about this before, we'll put a little bit of a premium on that first offer and figure the deal goes through somewhere between, call it $80 a share instead of $70 a share. Ultimately, the shareholders get to decide here so they can go against the board who rejected the offer and decide to accept this one. I suspect Broadcom will probably come back with one that's slightly higher. And we'll evaluate this as the deal goes through and assume,

48:15which is a big leap, that it will pass through regulatory approval. Because I was reading, there was another great stat that I saw that is from Bloomberg that if they combine, then 65% of the bill of materials of handset semiconductors will come from one single manufacturer. So we'll see if this actually clears regulatory approval but if it does that's the lens that we're viewing this through was that a good acquisition for broadcom yeah I think it's probably going to be a decent deal for broadcom right like as all this consolidation is happening like it's going to be an eventuality that either you are the consolidator or the consolidate and for broadcom to come out with an aggressive bid like this for Qualcomm, which even though their revenue is declining, is still a massive player in the space. And to try and pick them up for, as you pointed out,

49:13relatively a good deal, even if they can squeak it through at a premium, 10, 15% premium from the offer that they just made, probably feels like a pretty good deal as long as they're able to continue to realize the, uh, the economy is a scale. Yeah, I agree. So what does that translate to you? Um, for, you know, like a letter grade, how we do on the show, uh, trying to sweet talk my way out of that. Uh, gosh, I'm going to go, I don't know what to do other than a B right. Like it's not transformative. I know. Um, I know I'm thinking, I'm thinking of B2. We need some other category for like this needs to happen. It's the right thing to do, but like, it's, it's not great for anybody. It's not like, you know, I mean, it's kind of boring, even though the whole thing's actually, it's like an exciting space. Yeah. Like I'm actually really glad that we spent some time

50:09learning about the space, but, um, man, it's hard to get jazzed up the way we can about, you know, Instagram or, um, you, even the handset business with, with, um, Google and Motorola. Yeah. The question is, you know, so I'm with you on a B. I'll agree on that. 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?

50:44Yeah, well, I think that very well could happen in the phone business, but probably not in the, you know, IoT business, the embedded business. And then also there is the licensing and the patent element here, too, which we didn't talk about, but Qualcomm in particular, but Broadcom as well. They just make a ton of money from enforcing their patents and collecting royalties. Because again, they invented a lot of the core technology in the space. Yep. Man, I will be so curious what the story is to regulators of why this is not anti-competitive to push it through. And both in the US and in the EU, because they have different sort of definitions of what the regulatory bodies are looking for. So maybe we'll have to do a follow up episode should this be attempted and should it either go through or not. Well, maybe next time.

51:40Yep. All right. All right. Carve outs. Let's do it. Okay. So mine, um, we have been, uh, uh, we've been outfitting our new office in San Francisco down here. I thought this was going to be a San Francisco only carve out, but when I, when I went on the website, I realized it's also in Seattle and LA. So much of our audience is in luck. Big daddy's antiques is my carve out for the week. We've gotten a ton of pieces of furniture for our office. It's an awesome place. They have like really crazy fun stuff that's actually surprisingly like functional in an office setting. So that's a, that's my exciting carve out for the week. Sweet. Well, congratulations on your, your new antiques. From big daddies. From big daddies. Um, my, uh, my carve out is a super, 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

52:40to from Hacker News last week. And it is called Niagara Falls, the summer of 69, the dewatering of the American Falls. And it is a really cool historical bit of research put onto a website. And it's great. It's niagarafrontier.com slash dewater.html. It's basically the craziest thing happened. They dried up the American Falls and diverted all the water flow initially for some concern around erosion. And there's these just incredible pictures of people sort of walking right over the falls, what the falls look like without water, and the story of how they did it. And I learned what a cofferdam was. and it's one of these like you know sometimes when you're reading wikipedia or or a website like this you just get totally sucked in and fascinated by how they did this when they had you know um way less manufacturing capability and way less industrial capability that we had now

53:39and they still managed to um you know turn off an enormous faucet of water uh to do research on on basically what it was doing and uh um and just learn about it so super cool that we had Wait, so they shut off Niagara Falls? The American Falls, not the Canadian Falls. Ah, okay. And interestingly enough, I think, I have to do more research into this, but one of the comments was talking about how actually they have a lot more flow diverted to the Canadian Falls during the day because it is exciting to look at from a tourism perspective. And then at night, they divert a lot of that to the hydroelectric power plant, which makes the falls look less spectacular, but that's what we generate, why we're generating power. And actually we would benefit from having more water flowing through the hydroelectric power plant, but it would ruin the spectacle

54:29on the Canadian side of the falls. So random things that I never thought I would learn that are super cool to just dive into and looking at the pictures are just kind of wild. That's really cool. And, uh, and it's all from like 10 years ago, the website. Oh yeah, maybe more. I mean, I, I looked at, like I did the, I looked at the source and it is actually a front page website. So maybe 15, maybe 20. I don't know. That's awesome. Yeah. Yeah. You have to imagine. So I don't think there's any analytics on. First of all, it's amazing. The box that it's on is still up and running. Like, what is it? Is it co-load in some? Yeah. Where is that box? Server farm somewhere. I don't know. And you have to imagine there's no like JavaScript based analytics on it. So the only way that someone would ever know that there was an enormous

55:14amount of traffic that went to it from Hacker News that day was if they were actually probably monitoring the network activity in that data center going to the box. Dude, that would be such a fun geocaching type thing. It's like find old websites and then go find where they are physically hosted in the real world. Oh, that would be awesome. That reminds me a lot of like Mystery Show. Have you ever listened to Mystery Show? It's another podcast by Gimlet, or it was, I think they canceled it but they solve these crazy mysteries where you're not the the rule on that show is you're not allowed to use um not allowed to use the internet at all to look it up and you have to sort of the host is amazing at figuring out the mysteries but um this would be super cool to like try and use digital clues to figure out where it was physically hosted and find it and

56:00see if like perhaps it was not a armed guard secure data center so you could actually go find the box and well we got our next uh next project after acquired david coming soon to a podcast client near you. That's right. That's right. All right, listeners, now is a great time to talk about one of our favorite companies, Statsig. Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale. Yep. In the crazy speed of today's AI world, shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers and how fast you can use that signal to guide what you ship next. This is where Statsig comes in. It brings experimentation,

56:56feature flags, and product analytics into one unified system so teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved. So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com slash acquired to get started. We hope you enjoy the show. This is yet another opportunity to review Acquired and tell your friends about it. Share on social media should you feel the need. And thanks so much for being a listener. We'll see you next time. We'll see you next time.