Acquired - Qualcomm - Broadcom

0:00Are 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. I'm David Rosenthal. And we are your hosts. Today we are covering what would be the biggest tech acquisition of all time, Broadcom Acquiring Qualcomm.

0:35And 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.

1:04Yeah. 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. 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

1:56And 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, computers, servers, etc. And your car, your toaster, your everything these days.

2:11That's right, IoT explosion. Before we get too much into it, a couple of quick reminders. We've got a Slack where we are over a thousand strong. 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 acquire.fm. You can join in the sidebar or on mobile down at the bottom. The other thing is we love reviews. If you like the show and you think other people would like it to, pause the show right now.

2:41You 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 talk about a new partner of ours here on Acquired, LaGora, the agentic operating system that is redefining how the world's best legal teams work.

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4:51Plenty 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 slash acquired and just tell them that Ben and David sent you. All right. And with that, David, are you ready to take us in?

5:17Yeah, but before we get into history and fax today, I think there's some stage setting that'll probably come back and 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.

5:46Broadcom by Qualcomm, but that's far from the only thing happening in the semiconductor world right now. Well, and hilariously Silicon Valley, I mean the 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. Nope, indeed.

6:09There'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 sports and other things. But It all started really a couple of years ago.

6:40has 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 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's at $20 a share.

7:33today, 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. 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. 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.

8:12GPU 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...

8:26renaissance in terms of actual startups getting started in the semiconductor world, which hadn't happened in a long time. So just this week, Sequoia led a $50 million dollar round 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.

8:50Sequoia 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.

9:09pausing for a moment here, what's enabled that innovation? 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, about 10, 20, 30 years, and that happened because as we shrunk 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 ability to manufacture those. So only a few companies are actually doing the manufacturing because it costs 10 billion plus dollars to create one of these fabs. So suddenly you have this platform where

10:01you 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 you know everyone the phone companies before the internet everyone that came before to basically build platforms that you could do innovation on top of.

10:30Yes, 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.

10:43and like a software company in that you know as we're seeing with with this company graph core 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 uh that it just takes a ton of investment And then that's also not to mention sales investment, right? Because there's so many companies out there now competing for this segment.

11:13You've got the machine learning 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. That's TSMC, which I believe is the biggest, and then Samsung and Intel are the major fabs out there in the world. TSMC is over a $200 billion market cap company. 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 quarter of the market and that's what we're going to explore today and these are.

12:05kind 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 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.

12:38pretty much almost every chip within an iPhone, and an iPad is Apple designed in-house at this point. Ah, no, it is not. No. Oh, interesting. This is a good, I'll take a little segue here because 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 tear downs for each the iPhone X and the Pixel 2 XL.

13:03It is actually pretty surprising how many components are made by these companies that are in not only Android phones but iPhones. Well, we all know that Apple creates their own design for the A11 processor or the whole A series processors, the motion co-processor. I think they have their own audio, the digital signal processor now. Apple is designing all these things and they're having them contract manufactured by TSMC and Samsung.

13:31There'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...

13:52Some batches of phones get an Intel some some get the the Qualcomm the iPhone 10 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. 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.

14:38So 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.

15:00It goes to show how complicated this space is. Everybody is a frenemy. Everybody is a competitor. Everybody is an in co-opposition. Yeah, and even just this year, a number of chips in these devices is crazy. All right, listeners. Now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year on audit or a static PDF, then everyone would not, and you're done.

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17:03Let'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 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-Backert in 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?

18:08Yeah. 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.

18:58And 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 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 there 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 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

19:48There 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.

20:03Yep, 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 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

20:58private channels over one wavelength or one frequency in the air waves. 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 cell phone base stations.

21:30And then they started making handsets and chipsets for handsets, self-on-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 virtual cycle and became an 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.

22:18I 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.

22:39How 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 Brug? Well, you know, first they were making the base stations.

22:54and 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 they end up selling that business and they go into making chipsets that go into the phones. They sold the the handset business to Kiosera.

23:14I remember also having kiosks. They go into making chipsets. This is when they get into 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.

23:42That'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. 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 or after.

24:10I 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...

24:23We'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 manufacturing costs are enormous. The cycle to create the next new model is long and expensive. These companies in order to really compete with the vertical integrators themselves, with the handset manufacturers.

24:51have 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 buying from one so we'll we'll cut you deal We'll say you all the internals to this phone And they're really just feeling a lot of pressure by the the handset manufacturer starting to Take on some of this on their own where they need to preserve their margins by by combining yeah, I mean, this is really

25:26You 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. Right. Right. It so happens that this is so expensive to produce and so expensive to develop that it actually makes sense. Yep.

25:46Obviously, we've glossed over a lot there in the history and facts, but in an effort to keep this episode under three hours. I'm gonna, yeah, yeah, there's a couple things on history and facts that I want to pull out before we go into acquisition category.

26:01So 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 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 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 through regular It's interesting to 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 they're 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 prices depressed right now because of these external factors going on So if I'm broad-com what I'm seeing here is boy, there's an opportunity to get a

27:04great 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. 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.

27:29And 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. Along with Andreessen Horowitz. That's right. That's a small piece. 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...

27:55stock and $60 of cash per share for this. So it's interesting to sort of look at the structure of the deal a little bit and sort of 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.

28:22That 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.

28:47This is not a, not typically how things get done in this offer. Where, you know, Facebook buys you for 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 offered 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 MXP 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,

29:41Propose 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 ex-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 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.

30:23Yeah, 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 is just thought of as like a relatively sleepy stable corner in the industry. There is massive change happening. Absolutely right. All right listeners.

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32:23So 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 slash acquired and tell them that Ben and David sent you. 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. They're not buying new product lines. They're not buying differentiated technologies.

33:01There's no, as you pointed out, they're not fabs themselves, so they're not buying fab capacity. They're literally just buying consolidation within the existing sales channels that they're going through. Yeah, it's buying themselves more supplier power against their combined customers and trying to reduce cost to preserve margin.

33:27And 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 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 merge or required. It's funny. I remember doing it on something. Did we do it on Virgin and Alaska? I think Zillow.

33:53We 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 it 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.

34:16Neither David nor I have spent a ton of time doing the financial analysis on this company because a few hours ago we decided to call an audible and we were going to do it. We thought was going to be an exciting episode with Starwood 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 what we thought would be a boring episode. So with that whole caveat, it is interesting to look out.

35:05One thing that I haven't I haven't fully wrap 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 dollars of total revenue and Qualcomm did 23 billion dollars of revenue so I'm trying to sus 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 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.

36:03maybe balance sheet and maybe debt loads on these companies are different. But yeah, it does feel very much like a merger of Ecos here. Yeah, so here it is 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.

36:27grew 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. Yep.

36:51To 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 you. 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...

37:15these parts are commoditizing so fast like prices are, prices are just falling faster than, than the volumes are picking up. Yep. Yep. And there's a great article by Stacy Higgin-Batham on Stacy on IoT, 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 chip makers 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 something that I think, David, you probably think about a lot and evaluating investment opportunities too, but I don't think that

38:06until 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...

38:33Pure technology world right and what I mean by that is like the phone the smartphone world like and 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 those of these companies are making Broadcom and call-com 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, I think this was also part of that same piece, this idea that like, you know, whirlpool.

39:11isn't gonna start vertically integrating the chipsets in there you know jacuzzi's or whatever like or you know your toaster whoever makes your toaster isn't gonna start designing their own chips you watch so they can probably yeah you watch well that's that's actually apples next. It's gonna 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 chips. Well, software is eating the world. So I think we've covered a lot of tech names here. But 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 and I haven't is.

40:03So 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 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 and leading a $50 million around 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

40:54On the one hand, I totally get the statement and I agree with it. 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 getting swayed by trends and I think we'd all like to imagine that

41:50We 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.

42:17And 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 an 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, there's while they are fraught with danger and often don't end well.

42:45don'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.

43:07That'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 a hundred and ten million dollars 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 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.

43:37Yep. 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 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 dollars. And it's a pittance. It's a small potato. Right. Only a third of the fund. And I'm pretty sure they like.

44:19Buying 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 fab, but they made the reference designs for CPU chipsets.

44:42And 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 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 it with ARM, we saw it with Intel and the X86 chipset, we saw it with Qualcomm and CDMA. I never really thought about that, that even in a very capital intensive hardware space, you also can have network effect dynamics.

45:41Yeah, 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?

46:06more consolidation between gigantic companies like this because they can use debt for their acquisitions. That could be true, but it's nowhere near what we saw before the financial crisis in 2008. I mean, some of those companies were levered hugely. I remember looking at 5X leverage on these companies, and I don't think Qualcomm and Broadcom are that highly levered.

46:35Probably more like what we can go back and do the math, but probably more like somewhere between one to three X leverage. 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.

46:54there's going to be consolidation. There's already deals lined up and they're trying to do other deals before those deals close. 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.

47:15Yep, which is probably good to you up for creating 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.

47:31$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 will 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 materials of handset semiconductors will come from one single manufacturer. So 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,

48:27It's going to be an eventuality that either you are the Consolidator or the Consolidate E 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.

48:56probably feels like a pretty good deal as long as they're able to continue to realize the the economies of scale. Yeah, I agree. So what does that translate to you for, you know, like a letter grade? Yeah. Yeah, how we do on the show. Oh, is that what we're trying to sneak out of that one? Trying to sweet talk my way out of that. Gosh, I'm gonna go.

49:20I don't know what to do other than it be, right? Like it's not transformative. I know. I know. I'm thinking I'm thinking of B2. We need some other category for like this needs to happen. It's the right thing to do. But like it's it's not great for anybody. It's not like, you know, I mean, it's kind of boring. Even the whole thing is 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.

49:49Even the hands-in business with Google and Motorola. The question is, 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.

50:19I think that very well could happen in the phone business, but probably not in the IoT business, the embedded business. 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. Again, they invented a lot of the core technology in the space.

50:46Man, I will be so curious what the story is to regulators of why this is not anti-competitive to push it through and both 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?

51:11Maybe next time. Yep. All right. All right. Carvouts. 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 Carvout. But when I went on the website, I realized it's also in Seattle and LA. So much of our audiences in luck.

51:34big 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 that's my exciting carve out for the week sweet well congratulations on your your new antiques from big daddy's from big daddy's my 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 dewatering of the American Falls. And it is a really cool historical...

52:24bit of research put on to a website, and it's great. It's NiagaraFrontier.com slash Dwater.html. It's basically the craziest thing happened. 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 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 coffer dam was and it's one of these like 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 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.

53:21and just learn about it. So, super cool that we had- Wait, so they shut off Niagara Falls? The American Falls, not the Canadian Falls. And interestingly enough, I think I have to do more research into this, but one of the comments was talking about how actually the...

53:37They 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 power plant, which makes the falls look less spectacular, but that's what we generate by regenerating 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.

54:05Random things that I never thought I would learn this 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 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 in some. Yeah, where is the 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 to the box.

54:56Dude, that would be such a fun geocaching type things. 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 mystery show. Have you ever listened to Mystery Show? It's another podcast by Gimlet, or it was, I think they canceled it. But they saw all these crazy mysteries where the rule on that show is you're not allowed to use the internet at all, too.

55:24look 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 an armed guard secured data centers so you could actually go find the box. Well, we got our next project after acquired, David. Coming soon to a podcast client near you. That's right. That's right. All right, listeners. Now is a great time to talk about one of our favorite companies, Statsig. 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. 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.

56:16The 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 shipped next. 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. 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 slash acquired to get started. We hope you enjoyed the show. This is yet another opportunity to review acquired and tell your friends about it. Share on social media. Should you should you feel the need and thanks so much for being a listener. We'll see you next time.