SAN DIEGO _ A company that advises shareholders has recommended that Qualcomm investors support some but not all of Broadcom's board of director nominees as a catalyst for a negotiated deal between the two semiconductor giants.
After meeting with Broadcom and Qualcomm representatives last week, Institutional Shareholder Services called for shareholders to support four of Broadcom's six nominees for Qualcomm's 11 member board of directors.
That would give Broadcom a minority position on Qualcomm's board �� not the majority six seats that it's seeking at Qualcomm's March 6 annual meeting to push through its $121 billion hostile takeover.
But four board members would be within striking distance of a majority, which ISS said could result in talks toward a sale.
"We consider that the election of four Broadcom nominees to the 11-member board seems to offer a reasonable path to a negotiated deal, which is likely to be the most beneficial path for shareholders," ISS said.
Recommendations from ISS and rival proxy adviser Glass Lewis are important for mutual funds, hedge funds and other large institutional investors, which make up 78 percent of Qualcomm's shareholder base.
Some of these funds automatically follow the recommendations of ISS and Glass Lewis. Others are influenced by the guidance but aren't bound to follow it when voting their shares.
Glass Lewis is expected to make recommendations soon.
Qualcomm's technologies power cellular connections in most smartphones, and the company has been embroiled in a hostile takeover battle with rival chipmaker Broadcom since November.
Broadcom originally nominated 11 candidates to challenge all of Qualcomm's board members. This month, it cut its slate of nominees to six because of shareholder concerns over continuity during a possibly long regulatory review.
Qualcomm met with Broadcom last week for the first time and said it is open to more talks. Even so, Qualcomm's board rejected Broadcom's $82-a-share buyout offer as too low, claiming that it ignores the value from its pending acquisition of automotive chipmaker NXP Semiconductors, the eventual settlement of patent licensing disputes with Apple and the growth prospects from next-generation 5G mobile networks.
Qualcomm believes it can deliver up to $7 per share in adjusted earnings in fiscal 2019, which implies a stock price close to $100 a share.
Broadcom countered that Qualcomm's financial results have lagged behind its peers for years despite technology leadership in 4G networks. Moreover, Broadcom believes Qualcomm's patent licensing business model is broken and will never recover enough to reach its lofty growth targets.
Broadcom CEO Hock Tan has called $82 a share his "best and final offer."
In its report, ISS said Broadcom's offer in the short term "does not appear to be clearly superior to Qualcomm's potential standalone value."
But ISS noted that Qualcomm's total shareholder return of 74 percent over the past seven years significantly lags behind the 336 percent return of the Philadelphia Semiconductor Index.
Meanwhile, Broadcom has delivered 1,173 percent total shareholder return over that time, driven by acquisitions of five semiconductor companies since 2013.
"Here, (Qualcomm's) performance in recent years will surely weigh on shareholders, who may no longer be willing to give the company the benefit of the doubt," the ISS report said. "Qualcomm's optimistic vision of the future likely would resonate more effectively among shareholders if the company's track record was more like its would-be acquirer."
The proxy adviser said the best case for shareholders would be negotiations that allow Qualcomm to close its long-pending NXP acquisition without sidetracking Broadcom's buyout offer.
Fifteen months ago, Qualcomm agreed to pay $110 a share for NXP, which diversifies its business beyond smartphones.
But the deal still hasn't received regulatory approval in China. NXP shareholders also must pledge their shares for the acquisition, and activist investors believe the Dutch company is now worth $135 per share.
Broadcom said its $82 a share offer remains good if Qualcomm pays $110 per share for NXP but is off the table if Qualcomm pays more.
NXP provides a safety net for Qualcomm shareholders in case global competition regulators block Broadcom's takeover of Qualcomm, according to ISS.
Then Qualcomm should seek to negotiate a deal with Broadcom that would provide a good price and reasonable protections should a sale not close
Broadcom "has clearly signaled that there is room for improving the offer," said ISS in the report. "Thus, giving Broadcom's nominees a majority of the Qualcomm board does not seem appropriate at this time. Given the potential predisposition of any Broadcom nominees towards inking a deal, Qualcomm shareholders would most likely be limited to the offer currently on the table."
Qualcomm's shares ended trading Friday at $64.85 on the Nasdaq. Broadcom's shares closed trading at $248.89. U.S. markets were closed Monday for the Presidents Day holiday.
