KUHN CAPITAL Wednesday, March 21, 2018
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What Makes an M&A Deal Great?

August 10

Well, it’s more than simply financial arbitrage, for instance the sort of deals where the buyer has access to cheaper debt, or understands that debt can be used to reduce equity, thereby freeing money for higher returns elsewhere.

Rather, great M&A deals feature what’s come to sound like a cliché: operating synergies where the combination of resources bumps up scale economies, or advances strategic goals, which is a longer-view way of saying the same thing. So such deals are also carefully thought-out wagers on the future direction of industries and markets.

Cliché or not, such characteristics are not commonly found. So starting this month, we’ll point out deals where in our opinion synergies or strategies seem clear. Our first candidate is Qualcomm’s purchase of Flarion for about $600 million.

Qualcomm is a huge player, having built a $66 billion market cap with net income margins in the 40% range by exploiting a wireless transmission technique called CDMA or Code Division Multiple Access. CDMA allows a signal to be broken down and spread over multiple frequencies, then received by a device programmed to find and reassemble the signal. Your cell phone probably uses it.

The CDMA idea, which allows high speeds with minimal signal strengths, was originally developed for military use over 30 years ago and Qualcomm has developed improved versions thickly covered with patents that obligate wireless players to pay for the intellectual property in Qualcomm hardware, software and transmission services over and over again. Qualcomm has a reputation for playing hard-ball in defending its many patents and in extracting the maximum from its manufacturer and carrier clients

Now Qualcomm, in a move described by Mobile Pipeline as one “that could dramatically alter the wireless broadband landscape”, has agreed to buy VC-controlled Flarion Technologies.

Flarion, like the early Qualcomm, has had rapid success in promoting a proprietary wireless transmission technique, this one called FLASH-OFDM. OFDM competes directly with WiMAX, championed by Intel. While both approaches deliver high relative speed, OFDM is available now while mobile WiMAX won’t hit the market for at least a year. And OFDM crams its speed into a much smaller slice of RF spectrum, 1.25 MHz, making it three to four times more parsimonious than Qualcomm’s own CDMA and cheaper to implement.

So with Flarion Qualcomm controls a technology that, in the hands of a competitor, could threaten its CDMA dominance; introduces the company to a new generation of cellular carrier prey; positions it to optimally manage the market’s transition from one technology to the other should such development occur; and pump the technology through its formidable sales channel to the rest of the industry if doing so serves its self-interest.

Assuming a reasonable price was paid, this beats financial leverage any day.

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