On Thursday, February 8, 2018, Qualcomm Technologies, Inc., based in San Diego, California announced that its Board of Directors (“Board”) had unanimously rejected a 121 billion dollar buyout offer from Broadcom Limited. Broadcom’s 121 billion dollar offer was actually a revised offer, which increased the price per share from 70 dollars to 82 dollars. However, this increase was not enough to sway Qualcomm’s Board to accept the offer. The Board decided that Broadcom’s offer “materially undervalue[d]” Qualcomm and “fell short of the firm regulatory commitment the deal would demand, given the significant downside risk of a failed transaction.” Although Qualcomm adamantly rejected this offer, Broadcom remains committed to closing the deal and acquiring Qualcomm, as this acquisition of Qualcomm “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.”
So, what exactly is this thing we call a “buyout”? As the name suggests, one company/corporation “buys out” or purchases some percentage of another company/corporation. When this type of purchase takes place, the acquired, or target company (i.e., the company being purchased) experiences a change of ownership and control. Often, the term “buyout” is used as a very general term to describe what is actually a merger, acquisition, or takeover. For example, in causal day-to-day conversation “buyout” may be used to describe what is actually a “merger”. Legally speaking, a merger occurs when two companies combine to form a single company. Mergers typically occur between “two business that are about the same size and which recognize advantages [that] the other offers in terms of increasing sales, efficiencies, and capabilities.” Furthermore, mergers are often a result of friendly negotiations and mutual agreement between the two companies, and sometimes the two companies become equal partners or stockholders in the “new” company.
On the other hand, although a “buyout” may be used to describe an acquisition or a merger, an acquisition is actually quite different from a merger. An acquisition occurs when “one company buys another company and folds it into its [own] operations.” The company making the purchase is referred to as the acquiring company, and the company being purchased is referred to as the acquired company or the target company. Unlike a merger, which is typically a friendly transaction, an acquisition may be hostile if the acquired company does not agree to the terms of the acquisition. However, the end result of both a merger and an acquisition are the same: a “new” company is formed. It is the relationship between the two companies that differs depending on whether the transaction is a merger or an acquisition.
The specific type of transaction that occurs during a corporate buyout may also be dependent upon how the acquiring company values the target company. Acquiring companies often consider five things when valuing a target company: Earnings Before Interest Tax Depreciation & Amortization (“EBITDA”); growth in revenue; EBITDA margin; amount of leverage; and ownership. For example, since an acquiring company is likely to use debt to purchase the target company, the amount of leverage of the target company allows the acquirer to determine whether the target company can service that new debt if the buyout occurs. Although each of these five calculations provides specific valuation information about the target company, these numbers may heavily influence whether an acquirer decides to pursue a hostile or friendly acquisition of the target company.
Juliana Inman is a second-year law student at Wake Forest University School of Law. She holds a Bachelor of Arts in English from the University of North Carolina at Wilmington and is a native of Beaufort, North Carolina. Upon graduation Juliana intends to return to eastern North Carolina and practice family law.