The Broadcom/Qualcomm Merger through a Different Lens
Earlier in the semester, I wrote a blog post examining the proposed merger between Broadcom and Qualcomm under the framework of Managing Projects. This week our topic is Designing Supply Chains, and I thought a great way to explore the broad scope of Operations Management would be to analyze this deal in the new framework. This is an opportunity to show how one project or business function incorporates several aspects of OM, and that each of these is equally as important as the next to its own success.
We can look at most mergers on the topic of supply chain design, because often times these deals are an effort by firms to have a greater control either on their own supply chains or the supply chains of their competitors. In this case, Broadcom was making an effort to purchase one of its most direct competitors in an effort to decrease competition in the superconductor industry and gain a greater degree of control of the industry-wide supply chain. The deal was abandoned in March after President Trump blocked the merger on the basis of national security concerns.
One of the important aspects of supply chain design is integration. Integration relates to the way companies can organize or consolidate their supply chains. The reorganization or consolidation of a firm’s supply chain can lead to lower costs, and better responsiveness to changes in the firm’s market. The Broadcom/Qualcomm deal was an example of horizontal integration. Horizontal integration occurs when two firms at the same level of a supply chain merge to form one larger firm and effectively reduces competition and gains the new firm leverage in purchasing and pricing components and end products. Another common form of integration is vertical integration. This occurs when a firm purchases a firm at a different level in the supply chain. This move is also incredibly helpful in reducing costs by reducing redundant processes and decreases both fixed and variable costs in production.
The move by Broadcom would have significantly decreased competition in the semiconductor industry. Though the two firms produced different products and services, the overlaps would gain Broadcom significant leverage in the industry. Both firms are suppliers to Apple, a massive purchaser in the industry, and being able to consolidate that revenue under one umbrella would have been a huge gain for the firm. The newly consolidated firm would have been able to increase the selling price to Apple and other purchasers to increase revenue in both the short and long term.
Operations Management is a broad subject that touches just about every process that a firm must maintain and optimize to ensure that all of its goals are met. In this case we looked at a merger between two firms under the frameworks of project management and supply chain design. Though the teams that operate these processes may be different, both are incredibly important especially in a deal of this magnitude. A successful merger could lead to significant growth for the combined firm, but an unsuccessful completion could lead to massive, damaging consequences.
Christian,
I think exploring the topic of Mergers & Acquisitions is a great example of the topics being discussed in out class. M&A, among many other things, allows companies to expand or consolidate their supply chains to make them more competitive in their perspective markets.
Attached is an article discussing the cost synergies that may have been gained, had the merger not been blocked by the government. Broadcom had offered Qualcomm around 100 billion would have been able to move its headquarters back to the United States from Singapore to create a more centralized Supply chain. Broadcom had made its focus to create large annual cost savings. This merger would have allowed Broadcom to overlap R&D and administrative functions, and recognize large layoffs to create overwhelming cost savings, as well as a more efficient supply chain.
SOURCES: https://www.thestreet.com/story/14375671/1/3-reasons-why-a-broadcom-qualcomm-deal-makes-sense-and-3-big-questions.html
Christian,
I appreciated your use of the Designing Supply Chains framework to look at a previous post from a new perspective. The failed Broadcom/Qualcomm merger was a great example to explain horizontal integration and its benefits. I’ll definitely keep it in mind as an exemplary attempt at horizontal integration. For the purposes of my response, I’d like to stick with the topic of integration, however I’d like to highlight the growing trend in the healthcare industry of vertical integration. As you mentioned, vertical integration occurs when a firm expands into a different level of the supply chain. This expansion can be organic, however often times—and this is occurring in the healthcare industry right now—firms vertically integrate via strategic acquisitions.
In December, CVS announced it’s plans to purchase Aetna for $69mm (CNBC 1). As many of you probably know, CVS owns and manages drugstores. They are also run one the largest pharmacy benefits management (PBM) platforms. (A PBM is a firm that negotiates drug prices). Aetna, is not a retailer or pharmacy benefit manager (PBM), but an insurer. This is a clear example of vertical integration as these firms operate at different levels of the supply chain. The WSJ reported that the motivation for the merger was to offer a more affordable and higher-quality service to consumers (CNBC 1).
The major force driving this vertical integration has been the inflationary cost of healthcare. Presently, spending on healthcare “equals 18% of the nation’s gross domestic product, and that number is expected to reach 20% by 2025,” (CNBC 1). The high, and growing, cost of healthcare has (1) prompted new entrants such as Amazon, Berkshire Hathaway, and J.P. Morgan to enter the healthcare space in an effort to improve the industry, and (2) resulted in fierce competition between existing players to offer the lowest costs to consumers while maintaining high levels of service.
On the heels of the CVS-Aetna deal, insurer Cigna announced a deal of its own. The Insurer plans on buying Express Scripts, a PBM, for $67 billion (CNBC 2). Unlike the CVS deal that combines thousands of drug stores and CVS’ MinuteClinics, some analysts have doubted that the Cigna-Express Scripts deal would result in lower costs for end consumers (CNBC 2). However, they did acknowledge that the deal would likely create greater price transparency. In an industry as complex as healthcare, I think this trend toward vertical integration—especially if it results in a better understanding of service and pricing—is a step in the right direction for consumers and regulators alike. Lastly, the sheer shock of the price tags on these deals is indicative of the risks that healthcare players are willing to take to deliver better service and lower costs to consumers.
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CNBC 1: https://www.cnbc.com/2018/03/13/cvs-aetna-shareholders-approve-merger.html
CNBC 2: https://www.cnbc.com/2018/03/08/cigna-buying-express-scripts-wont-cause-a-revolution-but-it-makes-sense.html