Broadcom (NASDAQ: AVGO) stunned the tech world last month with its unsolicited $105 billion takeover bid for Qualcomm (NASDAQ: QCOM), the biggest mobile chipmaker in the world. Qualcomm promptly rejected the offer, but Broadcom will likely return with a higher bid next year.
The possibility of Broadcom acquiring Qualcomm has raised concerns about the chipmaker upsetting the balance of power between tech giants Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), and Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL).
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In fact, Microsoft and Google even privately discouraged Qualcomm from accepting a buyout, according to CNBC. According to the report, which cites sources "familiar with the matter," Microsoft and Google believe that Apple would be the main beneficiary if Broadcom seals the deal.
How could Broadcom's buyout hurt Microsoft and Google?
Microsoft and Google are both worried about Broadcom's history of cutting costs instead of investing in innovation. Broadcom, the company recently merged with Avago Technologies, has a long history of acquiring smaller chipmakers and focusing on the development of less capital-intensive analog chips.
Microsoft is currently partnered with Qualcomm in the development of Windows 10 PCs, which are powered by Qualcomm's ARM-based chipsets. That move could expand Windows' presence beyond x86 CPUs, and pave the way for the development of more ARM-powered tablets and 2-in-1 devices. If Broadcom buys Qualcomm and scales back this partnership, it could affect Microsoft's plans.
As for Google, the vast majority of its Android devices are powered by Qualcomm's Snapdragon SoCs. Google benefits from Qualcomm's big R&D investments in new chips, since they help top-tier Android devices compete against Apple's latest iPhones, which run on its own ARM-based A series chipsets. If Broadcom cuts Qualcomm's R&D spend, its chipsets could fall behind and widen the performance gap between Android and iOS devices.
Both Microsoft and Google are also concerned that Broadcom would dial back Qualcomm's investments in 5G networks, which would hamper the development of next-gen mobile devices.
How would a Broadcom buyout help Apple?
Broadcom, like Qualcomm, is a major Apple supplier. Broadcom supplies wireless charging chips, power amplifier modules, and touch screen controllers in Apple's latest iPhones. Qualcomm supplies the baseband modems.
Apple and Qualcomm are currently embroiled in a massive legal dispute regarding unpaid exclusivity rebates and licensing payments. Apple is suing Qualcomm in the US and China, and refuses to pay Qualcomm any more licensing fees. In turn, Qualcomm sued Apple's contract manufacturers, and is attempting to convince regulators to ban iPhone sales in China.
But if Broadcom buys Qualcomm, it might work out a deal with Apple to mutually drop all that litigation. Apple probably doesn't want to engage Broadcom in court, and Broadcom probably doesn't want to lose Apple's orders to other chipmakers. Since Broadcom would gain Qualcomm's components and its massive portfolio of wireless patents, it could offer Apple a bundle "sweetheart" deal which could generate long-term returns for Broadcom and lower manufacturing costs for Apple.
Moreover, if Broadcom acquires Qualcomm after the latter's planned takeover of NXP Semiconductors goes through, Broadcom would become the biggest automotive chipmaker in the world -- and a valuable partner for Apple's secretive self-driving plans.
Are Microsoft and Google overreacting?
Broadcom CEO Hock Tan previously declared that the company would not have offered to buy Qualcomm if "we were not confident that our common global customers would embrace the proposed combination."
Broadcom has a history of cutting costs, but there's no real reason for it to abandon Qualcomm's partnership with Microsoft, or spend less money on next-gen Snapdragon chipsets. Both moves expand Qualcomm's market and widen its moat -- which would in turn strengthen Broadcom. It also wouldn't make much sense for Broadcom to slash 5G investments, since it would be left behind the tech curve in mobile chips.
In addition, there's no proof that a Broadcom takeover of Qualcomm would discourage Apple from developing its own modems or switching over to Intel's modems for future iPhones. Meanwhile, the notion that the relationship between Apple and Qualcomm would improve after a Broadcom buyout is just speculation.
What's next for Broadcom and Qualcomm?
Microsoft and Google might have held talks with Qualcomm about Broadcom, but the opinions of Qualcomm's management might not matter for much longer if the deal goes hostile. In early December, Broadcom proposed to replace Qualcomm's entire board and take the issue straight to the company's shareholders.
Therefore, it's unclear what will happen to Broadcom and Qualcomm next year, but investors should buckle up and prepare for some big changes -- which may or may not hurt Microsoft and Google.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Apple. The Motley Fool owns shares of Qualcomm and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Broadcom Ltd, Intel, and NXP Semiconductors. The Motley Fool has a disclosure policy.