Broadcom electrified the tech world earlier this week when it made a $130 billion offer for Qualcomm. The advance looks set to be rebuffed by the Qualcomm board, but it seems likely that this is a story that will run for a while yet.

Given the sectors in which the two companies operate, patents are a crucial part of the asset base of both businesses. Were a merger to occur, the combined portfolio would be vast and immensely powerful – something that regulators across the world would be bound to pay very special attention to.

Following are five patent-based talking points - prepared by IAM’s North America editor Richard Lloyd and our man in Hong Kong, Jacob Schindler - relating to the proposed acquisition. There are many more on top, no doubt.

One that springs immediately to my mind is to what extent Qualcomm’s absorption into Broadcom might change regulatory perceptions of the SEP market generally. Qualcomm is known for its very aggressive approach to licensing. Were that to change following a Broadcom purchase, would it alter the way the wider market is seen? And, if so, could that work to the advantage of other big-name SEP owners, who would find themselves freed of the danger of being judged on the basis of the strategies pursued by their big American fellow-traveller?

Here’s what Richard and Jake have to say …

The Avago effect

The merger that created Broadcom as we know it happened just two years ago. At the time it was the biggest tech deal ever. But while the combined entity today uses the Broadcom name, it was Singapore’s Avago that bought Broadcom, and not the other way around. Beginning life as the chip unit of HP, Avago was spun out in 2005 and subsequently incorporated and headquartered in Singapore. However, its patent team has largely operated out of the US all along; while just last week, Broadcom’s Malaysian-American CEO Hock Tan told President Trump that the company would re-locate its headquarters to the US. So, on the face of it, this will not be a major US tech company being acquired by an Asian firm.

In targeting LSI, Broadcom and then Qualcomm for acquisition, Avago has each time taken over a patent portfolio much larger than its own. In the case of Broadcom there is some evidence that the target company became more active in enforcing its patents after the Avago team led by Tan took over management. Looking at Broadcom’s litigation activity on Lex Machina, there was a five year period from 2011-2015 when the company filed just one suit as a plaintiff (against NXP Semiconductors in 2013). In 2016 and 2017, it has filed no fewer than eight new cases, with defendants including Sony, Amazon, LG Electronics and Funai.

Avago’s management style is, by reputation, very focused on short-term financial results. One analyst sums up its modus operadi as: “Buy. Chop up. Sell off. Raise prices. Rinse. Repeat.” That mentality is not suggestive of a patent owner that will be content to pay fees to maintain one of the world’s biggest patent portfolios unless those assets are driving huge revenues. (JS)

The elephant in the deal

To understand the degree to which the spectre of Apple hangs over the blockbuster bid for Qualcomm, it’s worth reading Broadcom’s press release, which formally confirmed the takeover offer. In staking out just why his company’s approach makes sense, Broadcom President and CEO Hock Tan commented: “We would not make this offer if we were not confident that our common global customers would embrace the proposed transaction.” Apple is not mentioned anywhere in the release, but there’s no doubt that Tan is talking primarily about the iPhone maker when he refers to “common global customers”. Both Qualcomm and Broadcom technology, for instance, has been shown to feature in the new iPhone X.

Qualcomm and Apple have, of course, been embroiled in a multinational litigation campaign for most of the year – facing off over what is essentially a dispute over Qualcomm’s licensing practices and how much Apple should pay to use the chipmaker’s IP. A dispute between two giants of the smartphone world is not exactly a rare occurrence and typically these kind of fights have ended in an out-of-court deal. A settlement surely remains the most predictable outcome, but the longer the case drags on, the more the chances are that the two will have their day(s) in court.

As Tan’s comments suggest, in weighing up a bid, Broadcom has presumably received some encouragement from Cupertino and so if a deal does go through, the question is could Qualcomm’s new owners quickly resolve the numerous disputes with Apple? As the takeover continues to unfold, and assuming that the litigation is not settled, then selling out to the upstart chipmaker might prove particularly appealing to those Qualcomm shareholders who have grown weary of the expensive courtroom tussle. (RL)

Déjà vu all over again

For years Qualcomm has fielded queries from analysts and investors over whether the company should be split in two to separate the revenue-driving but low profit chip-making part of the company from the smaller but margin-rich licensing business known as Qualcomm Technology Licensing (QTL). The latter licenses the company’s vast trove of IP, which is one of the building blocks of the mobile world and, even though it saw a decline in revenues, it still delivered $6.5 billion to the company’s top line in the last fiscal year. Outside of the brand-name pharmaceutical sector, it’s hard to think of many patent portfolios as valuable as Qualcomm’s.

That leaves Broadcom, if it’s successful, with a choice to make — does it look to sell QTL as a way of raising capital to pay down any debt associated with the takeover or does it retain the business and all of the regulatory and customer tensions that it seems to inevitably generate? According to a Nomura Instinet analyst Broadcom could raise as much as $25 billion from a sale.

The last time Qualcomm undertook a review of whether to split in two in 2015, analysts from Arete Research Services predicted that the licensing business could be worth as much as $87 billion. The wide differences in those two numbers says a lot about the challenges facing any sale of QTL — valuing the business remains tricky and that’s before you go about trying to extricate it from the chip-making arm.

Plus there’s the question of who would buy. It’s hard to think of an operating company willing to spend billions on a licensing business, particularly in the current climate. That might mean that a consortium of private investors would be among the most likely purchasers or, alternatively, Broadcom could simply look to spin it off as a separate public company. Either way there is simply no precedent for an independent licensing operation of this size, let alone anyone with the experience to run it. A sale might look attractive on paper, making it happen is another matter entirely. (RL)

China will be wary

If Qualcomm does agree to be bought out by Broadcom, getting the deal past global antitrust regimes will be no small feat – regulators are bound to have a lot of questions about what would be the biggest tech sector merger of all time.

China might prove the biggest hurdle. It’s well known that the country’s authorities see semiconductors as a critical strategic industry, and have invested huge resources in decreasing their reliance on foreign firms – efforts that have time and again been stymied by US regulators on national security grounds.

Just two years ago Qualcomm’s licensing practices were found to be in violation of China’s Anti-Monopoly Law, and the chipmaker agreed to amend certain licensing practices in order to get the probe suspended. Rather than block a deal outright, Chinese regulators could potentially condition the sale on further concessions in the area of SEP licensing that could benefit domestic implementers.

The Ministry of Commerce (MOFCOM) is the body which looks at mergers in China, including any IP issues. In several past cases, its reviews of deals involving major IP portfolios have taken longer and imposed more stringent conditions than those of its US and European counterparts.

One instructive recent example to look at is Nokia’s acquisition of Alcatel-Lucent. MOFCOM conditionally approved the deal after several rounds of negotiation with Nokia in December 2015. According to Michael Gu of Anjie Law Firm, Nokia committed not to pursue SEP injunctions against good faith licensees, to notify Chinese licensees of any SEP disposals to a third party, to allow Chinese licencees to re-negotiate their deals in light of any major SEP disposals, and to transfer its FRAND obligations to any future buyer of its SEPs. If MOFCOM views the Broadcom/Qualcomm deal as having similar market effects, we could see the new entity asked to make similar promises. (JS)

It’s all politics

As patent reform has remained on the US agenda even after the America Invents Act (AIA) was signed into law in 2011, Qualcomm has emerged as one of the loudest voices against the kind of broad-based legislation that it and others have claimed would weaken patent rights in the US. The company is perhaps the most vocal member of the Innovation Alliance, the small advocacy group which also includes Dolby and Cantor Fitzgerald, and so if it were to become a less active player following any Broadcom deal it would have a significant impact on the balance of power in debates around patent policy. That’s not to say that Silicon Valley would suddenly have its own way — there are other constituencies such as big pharma that remain hugely influential in DC patent circles — but the loss of Qualcomm would be felt if it were to withdraw from debates on new legislation or the licensing of standard essential patents.

Something similar would apply in Europe, where Qualcomm has been one of the loudest voices seeking to influence the Commission as it prepares its much-anticipated Communication on the licensing of standard essential patents. Without its deep pockets, others would have to step up to the plate to match the spend that Silicon Valley’s big boys are prepared to make to get their case across. (RL)