Qualcomm - Broadcom

Ben & David cover the proposed largest tech M&A deal of all time, and in the process dive into the evolving dynamics of the industry that started everything in Silicon Valley—silicon. Just when VCs thought innovation was dead in semiconductors, a new wave of startups and large companies are redrawing the lines of competition in an industry dominated for a half-century by the “Wintel” duopoly of Intel and Microsoft. Sponsors: Vanta: https://bit.ly/acquiredvantaServiceNow: https://bit.ly/acquiredservicenow26Legora: https://bit.ly/acquiredlegoraStatsig: https://bit.ly/acquiredstatsig26 More Acquired! Get email updates https://www.acquired.fm/email with hints on next episode and follow-ups from recent episodesJoin the Slack http://acquired.fm/slackSubscribe to ACQ2 https://pod.link/acquiredlpMerch Store https://www.acquired.fm/store! © Copyright 2015-2026 ACQ, LLC Topics Covered Include: Innovation and disruption in the semiconductor industry over the past two yearsIntel’s acquisition of Nervana https://www.recode.net/2016/8/9/12413600/intel-buys-nervana--350-millionGraphcore https://techcrunch.com/2017/11/12/graphcore-raises-50m-amid-a-flurry-of-ai-chip-activity/ and other ML-focused semiconductor startupsCDMA https://en.wikipedia.org/wiki/Code-division_multiple_access and the telephone network effectQualcomm’s early cell phone handsets https://www.phonearena.com/news/Did-you-know-that-Qualcomm-used-to-make-cell-phones_id64941 Vertical integration + commoditization in smartphone chipsets The Carve Out: Ben: The de-watering of Niagara Falls http://www.niagarafrontier.com/dewater.htmlDavid: Big Daddy’s Antiques https://www.bdantiques.comBonus: The Mystery Show https://gimletmedia.com/mystery-show/

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Ben Gilbert?

  Are you drinking whiskey?

• 0:01David Rosenthal?

  No, tea.

• 0:02Ben Gilbert?

  I was like, that's a big, that's a big cup of whiskey.

• 0:17Ben Gilbert?

  Welcome back to episode 48 of Acquired, the podcast about technology acquisitions and IPOs. I'm Ben Gilbert.

• 0:24David Rosenthal?

  I'm David Rosenthal.

• 0:25Ben Gilbert?

  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, how this unfolds in front of us, David.

• 0:51David Rosenthal?

  Yeah, the battle of the comms.

• 0:53Ben Gilbert?

  Yeah, one M versus two, who will win?

• 0:57David Rosenthal?

  Reminds me of three com.

• 0:59Ben Gilbert?

  Yes, it's incredibly, incredibly creative names in this industry.

• 1:03David Rosenthal?

  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.

• 1:13Ben Gilbert?

  Okay, so for, for listeners who are maybe not as, as deep in semiconductor companies and wondering sort of what these companies do, they're both effectively fabulous semiconductor companies. So they, 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, 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.

• 1:55Ben Gilbert?

  And they, 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, for phones, computers, servers, et cetera.

• 2:06David Rosenthal?

  And your car, your toaster, your everything these days.

• 2:10Ben Gilbert?

  That's right, IOT explosion. Well, before we get too much into it, a couple of quick reminders. We've got a Slack where we are over 1,000 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 acquired.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 a longtime friend

• 2:53Ben Gilbert?

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• 3:38Ben Gilbert?

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• 4:23Ben Gilbert?

  Vanta customers at their companies over the years. So you can get $1,000 off Vanta at vanta.com/acquired. That's V-A-N-T-A dot com slash acquired for $1,000 off, and just tell them that Ben and David sent you. All right. And with that, David, are you ready to take us in?

• 4:42David Rosenthal?

  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 upfront. 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. There'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.

• 5:17Ben Gilbert?

  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 in Silicon Valley.

• 5:32David Rosenthal?

  Nope, indeed. There's just a lot going on in true Silicon Valley and in the rest of the world, Silicon Valley in 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 sports and other things. But it all started really a couple of 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

• 6:12David Rosenthal?

  another chipmaker, and for a long time, they 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.

• 6:40Ben Gilbert?

  You and I did the same math to prepare for this episode. I have January of 2016 at $26 a share.

• 6:46David Rosenthal?

  Yeah.

• 6:49David Rosenthal?

  This is, you know, we don't compare notes before we start here. We're keeping the conversation real. So 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.

• 7:10Ben Gilbert?

  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 games and for rendering. And it just so happens for the core technology, that's a piece of every new technology now, machine.

• 7:26David Rosenthal?

  Yep, yep. So we've got Nvidia, which is on fire 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 for $350 million. And that was kind of, in many ways, I think, the, the start of a renaissance in, in terms of actual startups getting started in the, in the semiconductor world, which hadn't happened in a long time. So just this week, Sequoia led a $50 million round in a company called Graphcore out of the UK, which also makes specialized chips for, for machine learning and deep learning applications.

• 8:11David Rosenthal?

  And what's crazy, this company's been around for only about a year. Sequoia just invested $50 million. They had already raised $60 million. So this company's 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.

• 8:33Ben Gilbert?

  It's worth pausing for a moment here, like what's enabled that, that innovation? I mean, aside from the market demand for new types of computing with, with machine learning, the need for just a few companies to consolidate and 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 the number of nanometers that were necessary or that we could, we could put on a wafer, not being very eloquent there. But basically, as we got more and more sophisticated at putting more and more transistors on a given wafer, it became more and more expensive to produce the the ability to manufacture those.

• 9:16Ben Gilbert?

  So only a few companies are actually doing the manufacturing because it costs 10 billion plus dollars to to create one of these fabs. So suddenly you have this platform where you don't need the actual capital to 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 tech 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, you know, everyone, the the phone companies before the internet, everyone that came before to basically build platforms that you could do innovation on top of.

• 9:54David Rosenthal?

  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 you were fabbing the chips and like a software company in that, you know, as we're seeing with with this company GraphCore, like 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, these things are so massively complex that it just takes a ton of investment into them. And then that's also not to mention sales investment, right? Because there are so many companies out there now competing for this this segment.

• 10:38David Rosenthal?

  You've got the machine learning, you know, sort of craze going on 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, which I believe is the biggest. And then Samsung and Intel are the major. fabs out there in the world and and TSMC is over a $200 billion market cap company. And and as you said, like, this is just pure commodity production of designs that other people are are making and including many of these machine learning driven companies. So that's in another corner of the market and those companies are growing as all this demand is coming online for chips that they're producing.

• 11:24David Rosenthal?

  And then you've got this third quarter 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 PSMI and Authentic episode, to the point where I believe almost, pretty much almost every chip within an iPhone and an iPad is is Apple designed in house at this point.

• 12:08Ben Gilbert?

  Ah, no, it is not.

• 12:10David Rosenthal?

  No.

• 12:11Ben Gilbert?

  Oh, interesting. This is a good, I'll take a little segue here because I, 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 but iPhones. And so, well, we all know that Apple creates their own design for the the A11 processor or the whole A series processors, the motion co-processor, 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.

• 12:56Ben Gilbert?

  There's actually plenty of Qualcomm and Broadcom components in the iPhone. So inside the iPhone X, 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 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.

• 13:41Ben Gilbert?

  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 there'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 X 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 the sort of main CPU itself. They compete on on all the radios and all the Bluetooth and the Wi-Fi and all that stuff.

• 14:23David Rosenthal?

  Interesting, interesting. Well, goes to show how complicated this space is.

• 14:28Ben Gilbert?

  Yeah, everybody is a frenemy. Everybody is a competitor. Everybody is in in co-opetition.

• 14:33David Rosenthal?

  Yeah, and even just the sheer number of chips in these devices is crazy.

• 14:38Ben Gilbert?

  All right, listeners. Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team and deploying them is no longer the hard part.

• 14:53David Rosenthal?

  Yeah, the hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making. AI security for an enterprise at scale is not a small concern. Like, the risks are real.

• 15:07Ben Gilbert?

  Exactly. And the challenge with AI is governing it, securing it, measuring it, and making sure that it actually delivers value. That is why ServiceNow built the AI control tower.

• 15:17David Rosenthal?

  Yep. AI Control Tower gives enterprises a single place to see, manage, govern, and optimize AI across the entire business. And it works with any AI, not just theirs. Every device on your network, every permission across every system, every AI agent, visible and secure in one place.

• 15:34Ben Gilbert?

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• 15:51David Rosenthal?

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• 16:07Ben Gilbert?

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• 16:16David Rosenthal?

  So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely, at scale, go check out servicenow.com/acquired and 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 having 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

• 17:01David Rosenthal?

  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.

• 17:23Ben Gilbert?

  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 what if HP was the largest smartphone component manufacturer?

• 17:33David Rosenthal?

  Yeah. Well, they might be in a better place than they are now. But that's for another episode. But Qualcomm will spend a little more time on this because I think this is such a fun story. So Qualcomm 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, from academia and in the, 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

• 18:16David Rosenthal?

  was started around, even though it became a semiconductor company, was the original network effect of the telephone. And, and what I mean by that is if you go back and think about kind of the Bell Telephone Company and 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. 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 CDMA.

• 19:01Ben Gilbert?

  We, we went with Singular specifically because my dad like was looking into this and decided that he wanted to make a bet on GSM. The 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.

• 19:28David Rosenthal?

  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 HDTV and Blu-ray of the mobile telephone world.

• 19:46Ben Gilbert?

  And consumers trying to understand that is a complete nightmare.

• 19:49David Rosenthal?

  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, they didn't invent the technology of CDMA, but they were the first to commercialize the application of this to the cellphone world of code division, multiple access. And what that technology did, it was a standard that allowed for communication, multiple access, the MA stands for. It allowed for the communication of many, many different private channels over one wavelength or one frequency in the airwaves.

• 20:30David Rosenthal?

  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. And the technology to do that was invented by Qualcomm. And so they started putting it into cellphone base stations. And then they started making handsets and chipsets for handsets, cellphone 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.

• 21:15David Rosenthal?

  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.

• 21:28Ben Gilbert?

  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 revenue is from licensing deals. I think I can get the actual number here. Yeah, Qualcomm's 10K last quarter, or last year, was 15.4 billion in revenue from equipment and services and 8 billion from licensing.

• 21:54David Rosenthal?

  And a lot of that, I think, goes back to this underlying technology that they're licensing out that's in just about every cellphone radio out there, base station. How do we get from there? This is in the late 90s, 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

• 22:35David Rosenthal?

  the phones. They sold the handset business to Kyocera. I remember also having Kyocera based phones. And so they go into making chipsets. And this is 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 a lot of the processors, especially the non-processors that aren't designed, the chips that aren't designed by the Apples and Samsungs themselves, start to become more commoditized. That's when we start to see consolidation happening in this space. This is when the Broadcom and Avago deal happened last year. And now Broadcom is coming in and attempting to buy Qualcomm to further consolidate.

• 23:18Ben Gilbert?

  Yeah. And one quick note, I want to rewind earlier where I said Broadcom doesn't make actual CPUs. They do make CPUs. The 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 gonna have to, I don't know, dig up one of those or something.

• 23:39Ben Gilbert?

  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 and 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. So, 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 and D costs, their manufacturing costs, all

• 24:22Ben Gilbert?

  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.

• 24:48David Rosenthal?

  Yeah, I mean, this is really, you know, I think this is one of the first times on this show, maybe other than the 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.

• 25:03Ben Gilbert?

  Right, right. It so happens that this is so expensive to produce and so expensive to develop that it actually makes sense.

• 25:10David Rosenthal?

  Yep. Obviously, we've glossed over a lot there in the history and facts, but in the, in an effort to keep this episode under three hours.

• 25:18Ben Gilbert?

  I'm gonna, yeah, yeah. There's a couple of things on history and facts that I want to pull out before we go into, into acquisition category. So, one of them is that this, 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. So let's say it's, you know, 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 that it's around that price. It's interesting to know all the other things going

• 26:03Ben Gilbert?

  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, I mean, they were trading at 70 bucks a share a year ago.

• 26:40Ben Gilbert?

  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.

• 27:05David Rosenthal?

  Along with Andreessen Horowitz is a small piece.

• 27:08Ben Gilbert?

  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 $10 of stock and $60 of cash per share for this. So it's interesting to sort of look at the the structure of the deal a little bit and sort of the 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 Broadcom is just being opportunistic and not not really being willing, at least at the first go around here, to pay for what the company is really worth.

• 27:47David Rosenthal?

  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.

• 28:19Ben Gilbert?

  And 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 it does close, or I'm sorry, if Broadcom does buy Qualcomm, what does that mean? Like, does the NXP deal go away? Do they try and continue doing that even as a combined entity? Will that go through regulatory approval?

• 29:00Ben Gilbert?

  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. And 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

• 29:40Ben Gilbert?

  just add the most complex structure possible on top of this deal to add a bunch of external complicating factors.

• 29:48David Rosenthal?

  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 what most of tech is just thought of as like a relatively sleepy, stable corner of the industry. There is massive change happening.

• 30:10Ben Gilbert?

  Absolutely right. All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired, Logora, the agentic operating system that is redefining how the world's best legal teams work.

• 30:24David Rosenthal?

  Yep. It's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Logora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

• 30:41Ben Gilbert?

  So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done.

• 30:56David Rosenthal?

  And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Logora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

• 31:20Ben Gilbert?

  And they recently launched Logora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective, then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required.

• 31:39David Rosenthal?

  And Logora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Logora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Logora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months.

• 32:09Ben Gilbert?

  Truly insane numbers. And that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at logora.com/acquired and just tell them that Ben and David sent you. Let's go into acquisition category. So David, where are you on that?

• 32:38David Rosenthal?

  Yeah, 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 like, they're not buying new product lines, they're not buying differentiated technologies. You know, there's no, as you pointed out, they're not, they're not fabs themselves, so they're not buying, you know, fab capacity. They're, they're literally just buying consolidation within the existing sales channels that they're going through.

• 33:16Ben Gilbert?

  Yeah, it's, it's, it's buying themselves more supplier power against their, their combined customers and trying to reduce, reduce costs to preserve margin. And as you said that, I'm nodding my head like, yes, you're exactly right. And I'm realizing somehow I don't think we've done a pure consolidation play on the show before. Forty-eight 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.

• 33:45David Rosenthal?

  It's funny. I, I remember doing it on something. Did, did we do it on Virgin and Alaska?

• 33:51Ben Gilbert?

  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.

• 34:01David Rosenthal?

  Yeah. I think we did call a 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.

• 34:13Ben Gilbert?

  Yep. Listeners, this is probably a good time to say, neither 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 and maybe not have done all of our financial analysis like we would normally

• 34:55Ben Gilbert?

  do at the alternative of doing a 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 I haven't fully wrapped my head around yet is why Broadcom is so much more valuable than Qualcomm. Because if you look at their profit margins are pretty similar. Qualcomm has 56% profit margins Broadcom is 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

• 35:35Ben Gilbert?

  why Broadcom is the 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 or 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 is buying up the smaller one. It really does kind of feel like a combination of very, very similar competitors.

• 35:59David Rosenthal?

  Yeah, totally. I'm wondering if maybe it was yeah, maybe balance sheet and maybe debt loads on these companies are different. But yeah, it does feel very much like a like a merger of eagles here.

• 36:10Ben Gilbert?

  Yeah, so here it is on on Yahoo Finance. Probably because of the combination of Avago and and Broadcom, their revenues in 2015 were at 6.8 billion and then spiked to 13.2 in 2016. So, you know, revenues grew tremendously. If you look over at Qualcomm, not only is it 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.

• 36:41David Rosenthal?

  Actually declining. Yeah, well, that's a recipe for not not getting a high multiple on your stack.

• 36:50Ben Gilbert?

  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.

• 36:58David Rosenthal?

  Yep. But I mean, that also speaks to, I think, you know, the markets that these companies are in 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.

• 37:21Ben Gilbert?

  Yep, yep. And there's a great article by Stacy Higginbotham on Stacy on IOT, her, um, 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 chipmakers into doing it in-house. I 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, it's something that I think, David, you probably think about a lot in evaluating investment opportunities too.

• 38:04Ben Gilbert?

  But I don't think that until very recently, um, 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, and, uh, people moving off the platform to do in-house.

• 38:23David Rosenthal?

  Well, it's, it's interesting, as I was thinking about this, this, uh, 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, um, 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, uh, I think this was also part of that same piece.

• 39:08David Rosenthal?

  This idea that like, you know, Whirlpool isn't going to start vertically integrating like the chipsets in there, you know, Jacuzzis or whatever, like, or, you know, your toaster, whoever makes your toaster, isn't going to start designing their own chips.

• 39:21Ben Gilbert?

  You watch.

• 39:22David Rosenthal?

  So they can probably, you watch. Well, that's, that's actually Apple's next growth market.

• 39:29Ben Gilbert?

  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.

• 39:48David Rosenthal?

  Well, software is eating the world. So I think we've covered a lot of tech themes here, but you know, one that I've been sort of puzzling over and I was, when we decided a couple of 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, I 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

• 40:33David Rosenthal?

  of course, as we're talking about are like super capital intensive. And now Sequoia's back this week, and they've invested in other semiconductors too, but back in the market, you know, and, and leading a $50 million round in 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, on the one hand, I totally get the statement and I agree with it. Like, you've got a very competitive market, but 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

• 41:17David Rosenthal?

  same time though, you do have this capital intensity that, 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?

• 41:31Ben Gilbert?

  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 and 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

• 42:13Ben Gilbert?

  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 incredibly high-risk, high-reward opportunity? I mean, these are $100 billion companies. And I think that if you can get something that even as a public stock, like Nvidia grows and 10x's like that, you know, there's, while they are fraught with danger and often don't end well and, you know, don't end well in almost every case, the winners are huge. So they're not zero marginal cost huge and they're not, they're not like Facebook, you know, you can increase your margins by 15% in one quarter.

• 42:58Ben Gilbert?

  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.

• 43:06David Rosenthal?

  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 $110 million into a company that still has 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.

• 43:31Ben Gilbert?

  Well, I mean, it goes right in line with people raising bigger and bigger funds these days, too.

• 43:37David Rosenthal?

  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. And yes, a SoftBank acquired ARM for $32 billion.

• 44:08David Rosenthal?

  And I guess

• 44:09Ben Gilbert?

  It's a pittance. Small potatoes.

• 44:12David Rosenthal?

  Right. Only a third of the fund.

• 44:15Ben Gilbert?

  And I'm pretty sure they like buying 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

• 44:28David Rosenthal?

  I believe it's actually probably very similar dynamics to Qualcomm where ARM was not a not a fab, but they made the reference designs for for CPU chipsets. And that actually is also a network effect game, just like CDMA and Qualcomm, where as more chipsets 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 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 gonna create the network effect.

• 45:09David Rosenthal?

  And I guess, 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 in this show is is this idea that standards can can lead to network effects. I mean, we saw with ARM, we saw 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 hardware space, you also can have network effect dynamics.

• 45:40Ben Gilbert?

  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 from a macroeconomic sense spur more consolidation between gigantic companies like this because they can use debt for their acquisitions?

• 46:13David Rosenthal?

  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 hugely. I remember looking at 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 somewhere between 1 to 3x levered. So I don't think we're quite at those heights yet, but certainly more so than in the software space.

• 46:48Ben Gilbert?

  Cool. Thanks. Okay. So one thing we skipped is what would have happened otherwise. There's going to be consolidation. Like there's already deals lined up and they're trying to do other deals before those deals close. Like if 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.

• 47:12David Rosenthal?

  That's certainly what it seems like.

• 47:15Ben Gilbert?

  Yep.

• 47:15David Rosenthal?

  Which is probably good to you up for.

• 47:17Ben Gilbert?

  Grading.

• 47:17David Rosenthal?

  Grading this.

• 47:18Ben Gilbert?

  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, you know, 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, which is a big leap, that it will, it'll pass through regulatory approval. Because I was reading, there was another great stat that I saw that is from Bloomberg that if they combine,

• 47:58Ben Gilbert?

  then 65% of the bill of materials of handset semiconductors will come from one single manufacturer. So that's, 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?

• 48:17David Rosenthal?

  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 consolidatee, 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, relatively 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 economy's a scale.

• 49:02Ben Gilbert?

  Yeah, I agree. So what does that translate to you for, like, a letter grade?

• 49:07David Rosenthal?

  Yeah.

• 49:07Ben Gilbert?

  Yeah, how we do on the show?

• 49:10David Rosenthal?

  Oh, is that what we do on the show?

• 49:12Ben Gilbert?

  I saw you trying to sneak out of that one.

• 49:15David Rosenthal?

  Tried to sweet talk my way out of that. Gosh, I'm gonna go, I don't know what to do other than a B, right? Like, it's not transformative.

• 49:24Ben Gilbert?

  I know. I know. I'm thinking, I'm thinking a B, too. We need some other category for, like, this needs to happen, it's the right thing to do, but like, it's not great for anybody. It's not like, you know?

• 49:35David Rosenthal?

  I mean...

• 49:35Ben Gilbert?

  It's kind of boring, even though the whole thing's actually, it's like, an exciting space.

• 49:38David Rosenthal?

  Yeah, like, I'm actually really glad that we spent some time learning about the space, but, man, it's hard to get jazzed up the way we can about Instagram, or even the handset business with Google and Motorola.

• 49:53Ben Gilbert?

  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?

• 50:17David Rosenthal?

  Yeah.

• 50:19David Rosenthal?

  I think that very well could happen in the phone business, but probably not in the 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.

• 50:45Ben Gilbert?

  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?

• 51:09David Rosenthal?

  Well, maybe next time.

• 51:12Ben Gilbert?

  Yep. All right, carve-outs.

• 51:15David Rosenthal?

  Let's do it. Okay, so mine, we have been, 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 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 my exciting carve-out for the week.

• 51:50Ben Gilbert?

  Sweet. Well, congratulations on your new antiques.

• 51:55David Rosenthal?

  From Big Daddy's.

• 51:57Ben Gilbert?

  From Big Daddy's. 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. It got linked to from Hacker News last week. And it is called Niagara Falls, the Summer of 69, the De-watering of the American Falls. And it is a really cool historical bit of research put onto a website. And it's great. It's Niagara. tier.com/dwater.html It's basically the craziest thing happened. They dried up the American Falls

• 52:37Ben Gilbert?

  and diverted all the water flow because of 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 a website like this, you just get totally sucked in and fascinated by how they did this when they had, you know, way less manufacturing capability and way less industrial capability that we had now. And they still managed to, you know, turn off an enormous faucet of water to do research on basically what it was doing and

• 53:20Ben Gilbert?

  and just learn about it. So, super cool that we had.

• 53:23David Rosenthal?

  Wait, so they shut, they shut off Niagara Falls?

• 53:25Ben Gilbert?

  The American Falls, not the Canadian Falls.

• 53:28David Rosenthal?

  Ah, okay.

• 53:28Ben Gilbert?

  And interestingly enough, I think, I have to like do more research into this, but one of the comments was talking about how actually the 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 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 on the Canadian side of the falls.

• 54:03David Rosenthal?

  Hmm.

• 54:04Ben Gilbert?

  So, random things that I never thought I would learn that is super cool to just dive into. And looking at the pictures are just kind of wild.

• 54:11David Rosenthal?

  That's really cool. And it's all from like 10 years ago, the website?

• 54:15Ben Gilbert?

  Oh, yeah, maybe more. I mean, 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.

• 54:25David Rosenthal?

  That's awesome.

• 54:27Ben Gilbert?

  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 colo d in some?

• 54:36David Rosenthal?

  Yeah. Where is that box?

• 54:37Ben Gilbert?

  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 amount 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.

• 54:56David Rosenthal?

  Dude, that would be such a fun, like, geocaching type thing. It's like, find old websites and then go find where they are physically hosted in the real world.

• 55:06Ben Gilbert?

  That would be awesome. That reminds me a lot of like, like Mystery Show. Have you ever listened to Mystery Show? The, 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, not allowed to use the internet at all to look it up. And you have to sort of, the, the host is amazing at figuring out the mysteries. But this would be super cool to like, try and use digital clues to figure out where it was physically hosted and find it and see 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, next project after acquired, David.

• 55:44David Rosenthal?

  Coming soon to a podcast client near you.

• 55:46Ben Gilbert?

  That's right. That's right.

• 55:48David Rosenthal?

  All right, listeners. Now is a great time to talk about one of our favorite companies, Statsig.

• 55:54Ben Gilbert?

  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.

• 56:05David Rosenthal?

  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.

• 56:25Ben Gilbert?

  This is where Statsig comes in. It brings experimentation, feature 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.

• 56:38David Rosenthal?

  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/acquired to get started.

• 56:49Ben Gilbert?

  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.

• 57:01David Rosenthal?

  We'll see you next time.