San Diego Faces Its Future as a Tech Hub Without Qualcomm as Anchor
As Qualcomm (NASDAQ: QCOM) prepares for its annual shareholders meeting Tuesday, March 6, its takeover battle with Broadcom (NASDAQ: BRCM), has much of San Diego pondering a question reminiscent of a Joni Mitchell song:
“Oh, don’t it always seem to go, that you don’t know what you’ve got ’til it’s gone?”
If Qualcomm accepts Broadcom’s proposal, estimated at somewhere around $120 billion, San Diego community leaders say the effects would be far-reaching—even if Broadcom elects to keep some part of Qualcomm’s operations local. For one thing, a successful Qualcomm buyout would be the technology industry’s biggest-ever takeover, creating a tech giant whose products would be used in nearly all of the world’s smartphones.
On the other hand, “The CEO of Broadcom doesn’t spend money on R&D,” said Greg McKee, who heads Connect, a San Diego nonprofit organization that promotes innovation and entrepreneurship. “So I think it’s a huge negative in the short run.”
Referring to a Wall Street Journal profile of Broadcom CEO Hoc Tan, McKee added, “His M.O. is to merge, strip out the R&D, and grow the top line [revenue.] The Street loves that guy.”
Qualcomm, in contrast, has a different corporate culture. It has grown into a global juggernaut in the wireless communications industry largely through its innovation prowess. If a Qualcomm employee’s name is on a patent filing, he or she can add the title “inventor” to their business card. Founded in San Diego in 1985, the company secured its rank as the world’s biggest maker of smartphone chips with the global adoption of its proprietary CDMA telecommunication standard in the 1990s. Since then, Qualcomm has remained an industry leader in its development of wireless processors, mobile computing, Wi-Fi, and related technologies. The company spent $5.48 billion on R&D in fiscal 2017, amounting to 24.5 percent of its $22.3 billion in annual revenue.
As The New York Times’ Conor Dougherty recently observed, Qualcomm founding CEO Irwin Jacobs also has emerged in recent decades as one of San Diego’s biggest benefactors, beginning perhaps most notably with a $100 million gift that rescued the financially troubled San Diego Symphony in 2002. Jacobs has made equally sizable gifts to UC San Diego’s engineering school and medical center, and provided crucial support to local community centers, the food bank, museums, theaters, and other charitable causes.
The UC San Diego Jacobs School of Engineering, where Jacobs served as a professor in the 1960s, has benefited in particular from the company’s presence. In addition to donations for buildings, endowed faculty chairs, and R&D programs, engineering dean Albert Pisano said, “There are other high-profile things like the fact that Qualcomm mentors and hires our students, and partners with our faculty and graduate students on research.”
But however much Qualcomm means to San Diego, community leaders say there isn’t much they can do to thwart the deal. “We hear from a civic leader about once a day on this, asking if there isn’t something we can do,” said Mark Cafferty, president of the nonprofit San Diego Regional Economic Development Corp (also known as the EDC). “But this isn’t an economic development issue,” Cafferty added. “This is a company that has had many challenges in their business. This is a shareholder and regulatory battle.”
“The situation here is that we couldn’t go to Qualcomm now with an incentive package that could help them stay,” Cafferty said. McKee agreed, saying in a recent interview that he sees no compelling reason for shareholders not to sell. Insiders control less than 1 percent of Qualcomm shares, while institutional shareholders control more than 76 percent, according to investment research firm Morningstar.
In the meantime, local civic leaders are doing what they can to call attention to the situation.
The EDC, working with the San Diego Regional Chamber of Commerce and San Diego Mayor Kevin Falconer, has kicked off a social media campaign to support Qualcomm that uses the hashtag #QualCOMMUNITY. Among other things, they are trying to highlight Qualcomm’s importance to the region, saying it is the largest public company in the region—with a market valuation of roughly $100 billion—and the largest private sector employer, with more than 13,000 employees in San Diego. In a recent assessment of Qualcomm’s role as an economic engine, the EDC estimates that Qualcomm’s economic impact here amounted to $4.9 billion in 2017—the equivalent of 35 Comic-Cons.
Fretful observers also may be heartened by the fact that the outcome of Broadcom’s proposed buyout is anything but a done deal.
Aside from numerous regulatory hurdles, Reuters reported recently the deal has come under additional scrutiny by an inter-agency national security panel that reviews transactions that might lead to foreign ownership of American defense contractors and other companies with technology deemed critical to national security.
While Broadcom’s CEO has vowed to move his corporate headquarters from Singapore to Delaware before the deal closes, that may not be enough to satisfy the panel, known officially as the Committee on Foreign Investment in the United States (CFIUS). As Reuters noted, the panel’s interest also is motivated at least in part by the fact that Broadcom is mounting what is essentially a hostile takeover by putting forward a slate of six Broadcom nominees for Qualcomm’s 11-member board.
[Editor’s note: In a rare intervention, CFIUS ordered Qualcomm to postpone its March 6 shareholder vote by 30 days to give the panel time to fully investigate the national security implications of the proposed deal. According to The New York Times, the committee typically works behind closed doors and reviews deals only after they are announced. In a statement Monday, Qualcomm said it would adjourn its shareholder meeting without taking a vote and reconvene its shareholders meeting on April 5 at 8 a.m. at Qualcomm’s San Diego headquarters.]
Qualcomm and its board also have worked assiduously to pick apart Broadcom’s offer, even after Broadcom boosted its offer to $82 a share in early February. The board voted unanimously a few days later to reject the revised offer, saying the proposal “materially undervalues” Qualcomm, and that Broadcom’s proposal fell short in the details in terms of resolving likely regulatory commitments such a deal requires.
In short, significant uncertainty surrounds the deal.
While Connect’s McKee said a successful buyout would be a huge negative in the short run if Broadcom succeeds, he said, “In the long run I have a totally different view, in that you have all these incredibly talented people at Qualcomm who will hopefully stay here, and maybe start new things.”
Losing Qualcomm would likely be similar to the loss of General Dynamics’ San Diego plants in the early 1990s, according to Mary Walshok, an associate vice chancellor at UC San Diego and a sociologist who studies the innovation economy. “Even if the worst case happens, San Diego has a history of pivoting as large centers of gravity caved in,” Walshok said.
At San Diego’s EvoNexus startup incubator, which is working to close a funding gap that would likely open if the nonprofit loses Qualcomm’s corporate support, CEO Rory Moore compares Qualcomm to a big “anchor tenant” in a shopping mall.
“When a company starts downsizing, talent starts looking elsewhere [for jobs],” Moore said. “Not everybody wants to be an entrepreneur, and they leave town.”
From a regional perspective, Moore said if there’s no anchor tech company in San Diego, it’s going to be difficult to get talented engineers and executives to move here. “The thing that would trouble me the most if I were mayor of San Diego is that when the talent starts to leak out, it hurts everything,” Moore said.