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Episode 48: Qualcomm - Broadcom

Episode 48: Qualcomm - Broadcom

Mon, 20 Nov 2017 14:54

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.

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Are you drinking whiskey? No, tea. That's a big cup of whiskey. Welcome back to episode 48 of Acquired, the podcast about technology, acquisitions, and IPOs. I'm Ben Gilbert. David Rosenthal. 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, I guess accounting for the debt that is part of the deal. And it'll be really fascinating to see how this unfolds in front of us, David. Yeah, the battle of the comms. Yeah, 1m versus 2. Who will win? Reminds me of 3com. Yes. It's incredibly, incredibly creative names in this industry. Well, I think one of the themes we'll get into today is what's old is new again. So, it's like we're back in the year 2001 here. Okay, so for listeners who are maybe not 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 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. And they make everything from the actual processors themselves to wireless radios and we'll get into that more on the show. But it's basically component makers for phones, computer servers, etc. And your car, your toaster, you're everything these days. 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 a thousand strong. So if you are, 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 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 to 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. Our presenting sponsor for this episode is not a sponsor, but another podcast that we love and want to recommend called the founders podcast. We have seen dozens of tweets that say something like my favorite podcast is acquired and founder. So we knew there's a natural fit. We know the host of founders. Well, David Senra. Hi, David. Hey, Ben. Hey, David. Thank you for joining us. Thank you for having me. I like how they group us together. And then they say it's like the best curriculum for founders and executives. It really is. We use your show for research a lot. I listened to your episode of the story of Akiyama Rita before we did our Sony episodes. This incredible primer. You know, he's actually a good example of why people listen to founders and so acquired because all of history's greatest entrepreneurs and investors. They had deep historical knowledge about the work that came before them. So like the founder of Sony, who did he influence? Steve Jobs talked about him over and over again if you do the research. But I think this is one of the reasons why people love both of our shows and there's such good compliments is on acquired. We focus on company histories. You tell the histories of the individual people. You're the people version of acquired and where the company version of founders listeners. The other fun thing to note is David will hit a topic from a bunch of different angles. So I just listened to an episode on Edwin Land from a biography that David did. David, it was the third fourth time you've done Polaroid. I've read five biographies of Edwin Land and I think I've made eight episodes of them because in my opinion, the greatest entrepreneur to ever do it, my favorite entrepreneur personally is Steve Jobs. And if you go back and listen to like a 20 year old Steve Jobs, he's talking about Edwin Land's My Hero. So the reason I did that is because I want to find out like I have my heroes. Who were their heroes and the beauty of this is the people may die, but the ideas never do. And so Edwin Land had passed away way before the apex of Apple, but Steve was still able to use those ideas. And now he's gone and we can use those ideas. And so I think what acquired is doing what a founder trying to do as well is find the best ideas in history and push them down to generations. Make sure they're not lost history. I love that. Well listeners, go check out the founders podcast after this episode. You can search for it in any podcast player. Lots of companies that David covers that we have yet to dive into here on acquired. So for more indulgence on companies and founders, go check it out. All right. And with that, David, are you ready to take us in? Yeah. But before we get into history and fax today, I think there's some stage setting that I'll probably come back and tech themes, but 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 by and Qualcomm. But that's far from the only thing happening in the semiconductor world right now. Well, and hilariously Silicon Valley, I mean, the Genesis and innovation of semiconductors is in Silicon Valley, the area south of San Francisco around San Jose. But Singapore based Broadcom and San Diego based Qualcomm are neither. Nope. Indeed. There's just a lot going on in true Silicon Valley and in the rest of the world, Silicon Valley and spirit. So I thought maybe we'd review just a couple things. And this might be depending on how you guys like this, maybe this will become another theme that we dig into here required, which is what's going on in the semiconductor world to go with our sort of mini series that we have on travel and and sports and other other things. But it all started really a couple of years ago, has with many things with the sort of boom in machine learning. If we could look at a company called Nvidia, which is another chip maker. And for a long time, they've made just graphics cards for PCs and video game consoles and workstations. And so if you were a gamer, you'd 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. You'd I did the same math to prepare for this episode. I have January of 2016 at $26 a share. Yeah. 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 10 x in two years. I mean, this is like, VCs would kill to have that kind of markup. And this is in the public markets. 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 games and for rendering. And it just so happens for the core technology that's a piece of every new technology now machine learning. Yep. Yep. So we've got Nvidia, which is on fire in a good way. You've got a company called Nirvana, which was 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 start of a renaissance in terms of actual startups getting started in the semiconductor world, which hadn't happened in a long time. So just this week, Sequoia let a $50 million around in a company called Graphcore out of the UK, which also makes specialized chips for machine learning and deep learning applications. 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. It's worth pausing for a moment here like what's enabled that innovation? I mean, aside from the market demand for new types of computing with machine learning, the need for just a few companies to consolidate and have most of the fabs in the silicon industry made sense. It's been around for a while, around 10, 20, 30 years. And that happened because as we shrunk the number of nanometers that were necessary or that 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. So only a few companies are actually doing the manufacturing because it costs $10 billion plus to create one of these fabs. So suddenly you have this platform where you don't need the actual capital 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 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 everyone, the phone companies before the internet, everyone that came before to basically build platforms that you could do innovation on top of. 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 fabbing the chips and a software company. As we're seeing with this company GraphCore, 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 because there's so many companies out there now competing for this segment. You've got the machine learning 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 TSMC is over a $200 billion market cap company. And as you said, this is just pure commodity production of designs that other people 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. And then you've got this third corner of the market and that's what we're going to explore today. And these are in many ways legacy large chip designers that really had a big run up over the last 10 years as the mobile era got installed. 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 PASMI and authentic episode to the point where I believe almost pretty much almost every chip within an iPhone and an iPad is Apple designed in house at this point. Ah, no, it is not. No, no, it's 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 build materials and the tear downs for each 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 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 is designing all these things and they're having them contract manufactured by TSMC and Samsung. 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 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 our Broadcom. And in the Pixel 2 XL, which is actually manufactured by LG and the HTC one is just the Pixel 2. Qualcomm makes a variety of components. They make the Snapdragon processor, which is the sort of counterpart to Apple's A11 Bionic chip. The 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 sort of main CPU itself. They compete on all the radios and all the Bluetooth and the Wi-Fi and all that stuff. Interesting. Interesting. Well, it goes to show how complicated this space is. Everybody is a frenemy. Everybody is a competitor. Everybody is an end co-opitition. Yeah. And even just this year, a number of chips in these devices is crazy. Okay. So with that backdrop, 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 their ads 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 name and Avago started life itself way back in the day as HP's semiconductor division has 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-Backer and the garage. 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? 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, 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 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 was started around even though it became a semiconductor company was the original network effect of the telephone. 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, you know, many of us remember they were sort of the carrier standard wars that were happening over the decade of 2000s and most of the 2010s of, you know, GSM versus CDMA. 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. Yeah, and so singular and AT&T were with the GSM standard as was T-Mobile in the US and and Verizon and Sprint were CDMA and they were incompatible with another one another. This was like the HD DVD and Blu-ray of, you know, the mobile telephone world. And consumers trying to understand that as a complete nightmare. 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 cell phone world of code division, multiple access. And what that technology did, it was a standard that allowed for communication and 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. And so that's how when, you know, you have however many millions of people all on a cellular network and they're all have their own, you know, 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 cell phone base stations. And then they started making handsets and chipsets for handsets, cell phone 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 virtualized cycle and became a network effect. 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. 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. And a lot of that I think goes back to this underlying technology that they're licensing out that's in just about every cell phone radio out there in base station. How do we get from there? This is in the 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, you know, 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 the phones. They sold the handset business to Kiosera. I remember also having Kiosera with 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 the Samsung's themselves, start to become more commoditized. That's when we start to see consolidation happening in this space. This is when the Broadcom and Ivago deal happened last year. And now Broadcom is coming in and attempting to buy Qualcomm to further consolidate. 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 and 10 as 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 or after. I don't know. Dig up one of those or something. 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&D costs to be a chip manufacturer are enormous. The manufacturer and 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&D costs, their manufacturing costs, all 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. Yeah, I mean, this is really, I think this is one of the first times on this show, maybe other than the Alaska Virgin episode where we've seen economies of scale actually be a thing because in software, it usually doesn't work that way. Right, right. It so happens that this is so expensive to produce and so expensive to develop that actually makes sense. 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. I'm going to yeah, yeah, there's a couple of things on history and facts that I want to pull out before we go into acquisition category. So one of them is that this deal, so we said it was rejected, 103 billion dollar deal, not including the assumed debt. I think it's 130 billion dollar purchase price, including the debt. It's a $70 per share and 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 and 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 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 per share a year ago. 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 values 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 like 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 this. Along with Andreessen, that's right. 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 a $10 of stock and $60 of cash per share for this. So it's interesting to look at the structure of the deal a little bit and 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 really being willing. At least at the first go around here to pay for what the company is really worth. 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 links 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 first stock. And just to add even more hair to the deal on both side, 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 semi-conductors 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? Does the NXP deal go away? Do they try and continue doing that even as a combined entity? Will that go through regulatory approval? 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 actually don't believe it explicitly, been said that that's what this is for, but Broadcom announced it will 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 and budding up to the Trump administration from the Broadcom side. Let's just add the most complex structure possible on top of this deal to to add a bunch of external complicating factors. Yeah, I mean, I think one thing we can say about this whole industry has been and I started to dive into it today is that it is massively complex and there is so much drama going on for, you know, what to most of tech has just thought of as like a relatively sleepy, stable corner of the industry. There is massive change happening. Absolutely right. Let's go into acquisition category. So David, where are you on that? 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 literally just buying consolidation within the existing sales channels that they're going through. Yeah, it's it's buying themselves more supplier power against their their combined customers and trying to reduce, reduce cost to preserve margin. And as you said that, I'm not in 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 48 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 required. It's funny. I remember doing it on something. Did we do it on Virgin and Alaska? 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. 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. 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 and Marriott. But as we were both taking 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 carved many times before. So listeners know that we would rather dive into a meaty subject like this and maybe not have done all of our financial analysis like we would normally 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, it's in 2016, $13.2 billion of total revenue. Qualcomm did $23 billion of revenue. So I'm trying to suss out here exactly why Broadcom is 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 something like that. But 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. 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 Ecos here. Yeah, so here it is on on Yahoo Finance. Probably because of the combination of Avago and Broadcom. Their revenues in 2015 were at $6.8 billion and then spiked to $13.2 in 2016. So revenues grew tremendously. If you look over at Qualcomm, not only 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. Actually declining, yeah, well, that's a recipe for not getting a high multiple on your stack. Yeah, 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. Yeah, but I mean, that also speaks to, I think, the markets that these companies are in right now, the smartphone market is just so saturated. It's not growing and prices are falling. Volumes may be growing, but because these parts are commoditizing so fast, prices are just falling faster than the volumes are picking up. Yep. There's a great article by Stacey Higgandbatham on Stacey on IoT, her blog or publication, talking about how when phone makers are vertically integrating, it means there's less room for the horizontal providers of the components because even though the markets are growing, there's now a been a precedent set by Apple where when you become hugely successful, you can graduate away from the chip makers into doing it in-house. I frequently think about this at Pioneers Grille 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 something that I think, David, you probably think about a lot and evaluating investment opportunities too, but I don't think that until very recently, 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 people moving off the platform to do it in-house. Well, it's interesting as I was thinking about 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 other devices that are clearly positioned built and sold by technology companies as technology devices. And I think that's probably one of the reasons why those of these companies are making Broadcom and Callcom are making such pushes in the quote-unquote IoT world of putting chipsets into all sorts of other non-traditional technology devices because those companies, you know, whether it's, I think this was also part of that same piece, this idea that like, you know, world pool isn't going to start vertically integrating the chipsets in there, you know, jacuzzi's or whatever, or like, or, you know, your toaster, whoever makes your toaster isn't going to start designing their own chips. You watch. So they can probably, yeah, you watch. Well, that's actually Apple's next good. 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 undistrupted things, not having their own, their own chips. Well, software is eating the world. So I think we've covered a lot of tech names here. But you know, when that I've been sort of puzzling over, and I was, when we decided a couple hours ago, we were going to cover this topic. I was really hoping to get an answer to when 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 been 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 of course is we're talking about are like super capital intensive. And now Sequoia's back this week and they've invested another semiconductor's too, but back in the market, you know, 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 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, 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 same time, though, you do have this capital intensity that can produce good returns and certainly has for broad comment of aggo and many other companies, TSMC and the other side of the market. I don't know. What do you think, Ben? 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 just 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 out of firm not having 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 10Xs like that, you know, there's 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 like Facebook, you know, you can increase your margins by 15% in one quarter. 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. 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 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. Well, I mean, it goes right in line with people raising bigger and bigger funds these days too. Yep. Well, and the one thing that we we didn't talk about in the beginning of the episode about all the activity in the semi-connector space is surprise surprise. Softbank is year two. So softbank acquired arm a couple 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. And that's a it's a pittance. It's a pitance. Yeah, right. Only a third of the fund. And 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 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 going to create the network effect. And I guess, you know, 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 show is this idea that standards 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'd never really thought about that, that even in a very capital intensive hardware space, you also can have network effect dynamics. 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 in 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. 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 what we can go back and do the math, but probably more like somewhere between one to three X levered. So I don't think we're quite at those heights yet, but certainly more so than the software space. 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. That's certainly what it seems like. Yep, which is probably good to you up for grading this. Yeah, so when we're thinking about creating this, David 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 pass through regulatory approval because I was reading, there was another great stat that I saw that is from Bloomberg that if they combine 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? 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 Consolidate, and for Broadcom to become 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, you know, 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 economies of scale. Yeah, I agree. So what does that translate to you for, you know, like a letter grade? Yeah, how we do on the show? Oh, is that what we do on the show? I thought you tried to sneak out of that one. I tried to sweet talk my way out of that. Gosh, I'm going to go, I don't know what to do other than a B, right? Like it's not transformative. I know. I know. I'm thinking a B2. 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, I mean, it's kind of boring, even though the whole thing's actually, it's like an exciting space. 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, you know, Instagram or even the hands-up business with Google and Motorola. Yeah. The question is, you know, that so I'm with you on a B algorithm 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? Yeah. Well, I think that very well could happen in the phone business, but probably not in the, you know, 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 Qualcomm 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. Yeah. 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? Well, maybe next time. All right. Carvats. Let's do it. Okay. So mine, we have been we've been outfitting our new office since the efforts Cisco down here. I thought this was going to be a San Francisco only Carvout, but when I went on the website, I realized it's also in Seattle, NLA. So much of our audiences in luck. Big Daddy's antiques is my Carvout 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 that's my exciting Carvout for the week. Sweet. Well, congratulations on your new antiques. From Big Daddy's. From Big Daddy's. My Carvout 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 that got linked to from hacker news last week. And it is called Niagara Falls, the summer of 69, the dewatering 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 slash dewater.html. It's basically the craziest thing happened. They dried up the American Falls and diverted all the water flow because of initially for some concern around erosion. And there's just incredible pictures of people sort of walking right over the falls. What the falls look like without water. And at the story of how they did it. And I learned what a coffer dam 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 turn off any enormous faucet of water to do research on basically what it was doing and just learn about it. So super cool that we had. Wait, so they shut they shut off Niagara Falls? The American Falls, not the Canadian Falls. 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 hydro elective hydroelectric power plant, which makes the falls looks less spectacular. But that's what we generate. Oh, why are we 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. 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. That's really cool. And it's all from like 10 years ago. The website. 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 maybe 15, maybe 20, I don't know. That's awesome. 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? It co-load and some yeah, where is that box ever 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 box. Dude, that would be such a fun like geocaching type view. Yeah. Like find old websites and then go find where they are physically hosted in the real world. 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 where it was. I think they canceled it. But they saw these crazy mysteries where you're not the the rule on that show is you're not allowed to use them. Not allowed to use the internet at all to look it up. And you have to sort of 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 secured data centers. So you can actually go find the box and well we got our next next project after acquired David. Coming soon to a podcast client near you. That's right. That's right. Speaking of a podcast client, 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. We'll see you next time.