Dear Satya, Also Read - Best laptops to buy under Rs 35,000 in October 2021: Asus VivoBook 15, Avita PURA, more
Congrats on your first year as CEO of Microsoft. I am impressed with some of the initiatives that you have taken. However, I do believe you and the board should strongly consider a combination with Qualcomm. Here are the top 5 reasons that the two companies should merge. Also Read - Arm-based notebook PC processor market could grow to $949 million in 2021
1. Patent Portfolio: Microsoft and Qualcomm will have a wireless patent portfolio that is stronger than Google’s (acquired from Motorola) and Apple’s. I believe Microsoft’s existing wireless patent portfolio and the nine year rights it has to Nokia’s patent portfolio combined with Qualcomm’s will be the most valuable wireless patent portfolio on the planet. Also Read - Best laptops under Rs 30,000 in October 2021: Lenovo V14, ASUS VivoBook 14, more
2. Better Products: The combined entity will be in an enviable position of offering a fully integrated portfolio of Windows Phones, Windows Desktops, Surfaces, Xbox with expertise and dominant position in:
iii. Operating Systems
3. Synergy: Both companies have a rich history of licensing their patent portfolio. Microsoft for almost thirty years has licensed its Windows and Office suite to OEM’s. Not to be outdone, Qualcomm for twenty years has licensed its CDMA and other RF patents to OEMs and network infrastructure providers. Moreover, Qualcomm’s chips business combined with Microsoft’s operating systems and applications business should enable the company to compete effectively with Apple, IBM, HP and Dell.
4. Diversification: The joint entity will have revenue streams from not only licensing but also hardware and software sales.
a. Imagine a company that generates revenues by licensing:
i. Operating systems
iii. Radio frequency patents
b. Now imagine a company that generates revenues by selling:
iii. Hardware (Mobile Devices, PC’s Servers)
5. Revenue & Earnings Growth: The joint entity should be able to increase revenues, reduce operating expenses and grow earnings 6-12 months after the combination is complete.
Satya, you are accustomed to hearing pitches from not only your corporate development staff, but also from the best investment bankers in the business. I am no McKinsey & Company or Bain consultant, however, for the merger to be successful the following merit your consideration:
- For the merger to be successful it is necessary for Qualcomm to be a wholly owned subsidiary of Microsoft. If Microsoft tries to merge Qualcomm with its operating units the combination will be doomed.
- Microsoft should hope that Qualcomm stock stays depressed (12 month return -4.59 percent for Qualcomm Vs. 27 percent for Microsoft) and you may get away with a 10-15 percent premium.
- It should be relatively easy to sell Nokia to a Chinese or Indian mobile device company. Remember, Google sold the device units of Motorola to Lenovo. In fact, a proposed sell of Nokia by Microsoft should be worth more if it is able to “throw” in some pieces of Qualcomm that may not be of strategic value.
- Microsoft and Qualcomm’s net cash balances are approximately $70 billion and $17 billion respectively and their market capitalization is $380 billion and $120 billion respectively. If Microsoft is able to use some of its overseas cash the acquisition becomes a lot “cheaper.”
- The combined entity should have revenue exceeding $125 billion (in the last four quarters Microsoft reported revenues of $90 billion and Qualcomm reported $26 billion), second only to Apple in the US and third globally in tech company revenue rankings. Samsung is ranked as the number one tech company globally with revenues of $200 billion.
Amandeep Kapoor is a US-based mobile/telecom veteran.