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Why Qualcomm Turned Down Broadcom's $121 Billion Offer—And What Comes Next

Qualcomm CEO Steve Mollenkopf at Fortune Brainstorm Tech. Aspen, Colo. July 17, 2017. Fortune Brainstorm Tech

Broadcom said its $121 billion acquisition proposal for Qualcomm is the “best and final” offer after the target’s board unanimously rejected the sweetened bid, likely leaving the future of the hostile takeover bid to be decided by shareholders next month.

Broadcom Chief Executive Officer Hock Tan urged Qualcomm qcom to meet this weekend to discuss the $82 a share offer and dangled the prospect of an $8 billion reverse termination fee in a letter to Paul Jacobs, chairman of the board. Tan said he was “astonished” the target wasn’t willing to meet until Tuesday, after the companies are scheduled to meet with proxy advisers Glass Lewis and ISS.

The offer “materially undervalues” Qualcomm and “falls well short of the firm regulatory commitment” needed to gain approval for such a transaction, the San Diego-based company said Thursday in a statement. The deal would take the form of $60 in cash and the remainder in Broadcom avgo shares, a bump of 17% from its opening offer in November of $70 a share, which Qualcomm also rejected.

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Qualcomm’s second dismissal of Broadcom’s approach puts the focus on a March 6 shareholder vote on whether to replace the smartphone-chipmaker’s board with Broadcom’s own nominees. The vote will represent a choice between Broadcom’s strategy, under Tan, of acquiring companies and focusing on boosting profits, or Qualcomm management’s promise of future growth fueled by investment in new products and technology.

“Your proposal is inferior relative to our prospects as an independent company and is significantly below both trading and transaction multiples in our sector,” Jacobs wrote in an open letter to Broadcom’s Tan.

Broadcom’s bid for the larger company is Tan’s most audacious move following a string of deals that have already made his company one of the world’s largest suppliers of semiconductors. He wants Qualcomm for its leading smartphone modem-chip division, an example of what he calls a “franchise” that will continue to dominate its industry. The market likes what Tan has accomplished so far. Stock of his company — formerly called Avago Technologies — ended 2009 at $18.29. It’s currently trading at more than $229.

Qualcomm’s contention that the chipmaker’s future is brighter as a standalone company has become a tougher sell, given the multiple challenges that have cropped up in the past two years. The greatest concern centers around Qualcomm’s lucrative technology-licensing business.

Regulators around the world are fining or investigating Qualcomm, supporting elements of Apple’s claims in a lawsuit alleging Qualcomm abuses its dominant position in mobile chips. Qualcomm has countered that it expects to win in court over time and overturn some of the more than $4 billion it has been fined.

Broadcom’s takeover attempt is complicated further by Qualcomm’s pending acquisition of NXP Semiconductors nxpi , meant to give Qualcomm broader access to new markets. That $47 billion deal is close to securing final regulatory approval. Once that happens, Qualcomm will need to negotiate with a group of funds that have taken a position in the Dutch company’s stock, demanding a boost to the $110-a-share price agreed to by NXP’s board. Broadcom said its new offer for Qualcomm is contingent on that transaction either closing at the originally agreed price, or being abandoned.

“Your proposal ascribes no value to our accretive NXP acquisition, no value for the expected resolution of our current licensing disputes and no value for the significant opportunity in 5G,” Qualcomm’s Jacobs wrote.

Qualcomm’s licensing business is central to both its profits and its ability to stay ahead in mobile-phone chip technology. Most of the company’s profit comes from collecting fees for the use of patents that cover the fundamentals of all modern phone systems. That cash influx fuels industry-leading research and design, which in turn helps the chip unit build the most advanced products. Management has argued that leadership in smartphones will help Qualcomm expand into new areas such as server chips, personal-computer processors and automotive chips.

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