Broadcom-Qualcomm Would Create Cross-Sector Chips Powerhouse, Srinivasan Says

more from a Trina Aston. He is our senior semiconductor and hardware analyst for Bloomberg Intelligence. Also joining us is Brooks Sutherland, our mergers and acquisitions columnist for Bloomberg gad Fly. Thank you both for being here on Maybe you can start by just explaining why this might be a good deal for Broadcom. Look, I mean this creates a powerhouse, create an alto Intel, if you will. And Broadcom's um claim to the semiconductor industry comes from the fact that

it is a phenomenal roller up of companies. It's done this pretty extensively since its existence, and in in doing Broadcom first acquiring Brocade first, Avago buying Broadcom then the renaming themselves to Broadcom, buying Brocade, and then potentially buying Qualcom, which is in and of itself. In the process of buying n XP will assemble a company that is very very strong in the data center and all your routers,

which is all your networking gear. Number one. It will be incredibly powerful in your phone, both from a modem and processor perspective as well as the RF chip. And if they're able to swing an XP into that equation, they will own your auto two, so, so and and in. One of the things that comes as a byproduct of UH Qualcomm's management focus in this equation is that they are an incredible leverager of costs. UH there a s g n A is a percentage of sales is actually

incredibly low in the semiconductor industry. UM, they'll have a tremendous amount of scale and reduced manufacturing costs. So from a whole host of angles, this makes a lot of sense. Now if you look at Qualcom, the target entity, it's got some drama going on with its intellectual property assets and it's embroiled with in litigation with with with Apple.

Broad Broadcom is much much more friendly with Apple so potentially they come in, they readjust this relationship, reassess where royalty rates are, and UM start a new relationship going forward. I think that that is doable. UM. If they're not willing to do that, you can potentially corral the i P assets in a in a particular UH basket, potentially sell it off or potentially diminish its value, move all

the IP over to the chip division. There's a whole host of things you can do here, UM, and I think it makes for a very very compelling semiconductor company. All right, Son, you seem to be pretty optimistic about this whole deal and sort of the rationale behind it. Brooke, come on in here, because you express some skepticism in a recent column saying that u Qualcom is not such an obvious target, and there are so many moving pieces

here that all have to fit together perfectly. Given the fact that the n XP purchase hasn't been completed yet and because of all these mergers, can you just walk us through your your thinking here? Yeah? I think that would be You know, my biggest sort of pushback is that you are piling you know, I think at this point six big deals on top of each other if this goes ahead, if you include you know, the purchases and a n XP made before clock n XP, or

the purchases that Brocade Maine. I mean, so I you know, to and on the point, I think that Broadcom CEO Hawk Tan is known as this good operator and this sort of skilled master of rolling up deals. But we're talking about multitudes of what he's done in the past. And any time you talk about a mega merger, there's integration risk there. If you start piling them on top of each other, it just makes everything more complicated. And it's not like these companies are just humming along perfectly

at this point. You know, I think there are probably opportunities to reassess the Apple situation or to you know, sort of rethink the configuration of the businesses, but that is also going to be complicated, and it does sort of open up maybe the potential for increased competition from some of these companies rivals um and you know, I think sort of just raises the question of ultimately what this company is going to look like and how well it's going to be able to What about the debt,

I mean, how is it going to pay for it? Well, that's The other thing is that you you know, the debt load after all of these deals. Their companies are sitting on a pretty hefty burden here. And I think you know that that is another factor here that you have to think about, is that what is the motivation for all of these deals. I mean, they're not doing

it because they're growing really well on their own. They're doing that because this is the opportunity for them to get scale and to sort of build growth through M and A. And I think you know, anytime you sort of see that happening in the companies simultaneously piling on debt, I you know, I think that should give you pause. You know, I'm actually going to push back on that for a whole host of reasons. One is that if you look at the revenue profiles on on all of

these companies, there's very little overlap. If you look at Broadcom, Brocade, n XP, Qualcom, the overlap the adjacencies are are between Broadcomm and Brocade are pretty significant. Between Broadcom and Qualcom are pretty significant. But there's no reason Qualcom is buying n xp s because it wants to diversify away from handsets. And how far do you have to get away. You

can go go to autos. The other part of it is, for the last five years we've been writing about semiconductors being the new industrials and the fact that they are cash rich and debt poor. And you know, debt has never been a good word in the technology industry. And debt is cheap, right, and there is capital term set stake here, and an optimal mix of debt is is good UM investor friendly nights Brook, what do you think

at a response? No, I mean, I think, you know, there's there's two sides of this coin, but I just think, you know, having seen a lot of these big deals, and you know, I understand that the semi conductor industry is sort of adapting to this new sort of financial profile, but you know that is debt and integration risk is is still there, and so I think we'll just sort of see how this plays out. But there certainly are

risks here. It's definitely gonna be interesting to watch, especially because Upqualcom is saying that they're not going to accept it, so Broadcom is going to probably have to wage some kind of proxy war. So it should be interesting to see how this plays out. A non screen of US and senior semi conductor and hardware analyst for Bloomberg Intelligence. Our thanks to you and our thanks to you. Brook Sutherland, Mergers and Acquisitions columnist for Bloomberg Gadfly Bloomberg dot com

slash goad Fly. You can find all the columns there. And you know both of you raise really good points. I mean, I think it's going to be interesting to watch the biggest tech deal on record. Shares of Michael Course Holdings they're up more than thirteen and a half percent. This comes after the company handily beats earnings estimates in the fiscal second quarter. Despite the drop in the same

store sales, they posted better than expected results. The retailer preparing a yes for that all important holiday shopping season. And here to help us understand what's going on is the all important Craig Johnson. He is the president of Customer Growth Partners. They're based in New Canaan, Connecticut, and he joins us now. Craig, thank you very much for being with us. Tell us what do you see as the positive and negative aspects of what Michael Core's Holdings

is doing right now? Uh? Well, first, good morning him. Great to be with you and Lisa. Um. Of course, of course we've been noticing, and you know, we have a team of eighteen people across the country's another person in London, so we're in the stores every week, and we've seen kind of a step by step recovery there. Um that you know, it's not quite in the positive territories, but it had been mid to high single digits and the guided to negative mid single digits. Now the only

one point a percent negative. And um, we think there's a company that slowly, slowly returning to health after some very severe damage to the brand by via over distribution, over promotion and so forth, and by going back to the basics of its core DNA style and fashion skills. We think it's on the way back. So those are the major factors. Uh, there's you know a couple of the factors. You know that the watches there are strong and you know, watches have been in the ditch for

a couple of years now. The watches are having a nice comeback this holiday and that's another factor as well. So Craig, can you sort of expand out based on the success that Michael course has had and turning itself around, can you extra polate out who you expect to do well this holiday season coming up and who you don't based on who has made an effort at changing with

the times. Well, the I want to be carefully you don't want to extrapolate too much off of uh, you know, you know one company that has had let's just say, some ups and downs and you know, they've been pretty challenged for the last year or two. But again on the on the road to recovery, we say, right now, um, but if if you look across the spectrum some of the players are that have been challenged, you're going to

continue to be challenged. Irrespect you of course performance and I particularly mean the department stress sector there and that with the potential exception of nor Them, which is really doing fairly well, the sector is very very challenged UM. And then you have other sectors such as apparel broadly UM, which is doing better than it was earlier in the year, but it's still only going to get to maybe two percent year of year growth this holiday as a sector.

And so it's you know, it's a little bit of a mixed bag among facts about what we're seeing overall is is that if we've done these these we've done annual forecasts since the turn of the century, this century, um, and we're seeing the sales as being up four point three percent year of a year, and that's compared to a consensus about three point seven And we think the risk to our forecast there's overall retailed. The risk of the forecast is not on the downside. The risk is

actually more likely to be the high side. You know, all the signals where our team has been seeing. We've issued our forecast last month, but everything we've seen since then confirms that this may actually be not just a four point three percent, but could even approached towards five percent, which will be the best growth in some years. Craig, not to to port too much cold water on the Michael Course story, but you know, the purchase of Jimmy Chew obviously going to add sales to the to the

to the company. But when you look at the camp store sales, the numbers were not that great, right, I mean Camp store sales down about two uh A lot of this the income had to do with reduction in the tax rate, and um, you know, I'm just wondering if your flagship label in the same store sales category are gonna fall in the high single digits in the Christmas quarter and decline the description is by the mid single digits in the fiscal year as a whole. How

does that point to a turnaround? I mean, and maybe you can twin that with the concept of tapestry, you know, the old coach they're reporting tomorrow, so that you go out, you buy Jimmy Chew. You say things are great, but if your flagship brand isn't working well, what you have to look at is is that here's a company that's been so deeply troubled for a good a good couple

of years. Although the seeds of that difficulty go back four or five six years when this when the store began to um over expand over distribute um was in doors worldwide. It just it was too much. You don't need that, and you you do. You can destroy your brand that way, and to repair that brand damage when you're so over promoted and you're so overdistributed. That doesn't

happen overnight. So we see the one camp that negative that they reported this quarter as being compared to guidance of negative mid single digits, and for the last several quarters they've been running high single digits, uh negative or even a little a little worse. And so one is improvement. Now whether how how steady that's going to be going full it is a little bit of a little bit of an open question. But the first thing they needed to do was take the hard medicine of cutting back

on the promotions and cutting back on the distribution. And so the comp numbers may bounce around a little because you're comparing numbers versus last year when they were, you know, juicing up the the promotional hype. Right well, Craig, you know, I just want to get your sense about this upcoming holiday season. I mean, it's got to be a make it or break it period for a lot of retailers.

If they cannot at least boost their revenues by hooking onto the increase in watches or luxury sales or technology, then are they dead? Because we're seeing consumers actually spend more and we're seeing the economy doing well. If they can't make it now, is this it? Well I'm not prepared to say this this is it, but people that don't react to way the consumers are behaving now, the way they're spinning choices are changing. Um, they are going to get crushed. But the smart players, um are are

reacting like the watches are are are coming back. And so you have the you know the Apple series three. They they finally got it right, you know on the third try. Uh, that's that's that's that's better. You have an overall economy that's expanding. Um, you know, disposable income is up. There's a wealth effect coming at tourist and returning.

And clearly, if if you're a retailer and you don't do well in this season, when overall reach out growth is going to be you know four three four eight, somewhere in that neighborhood, Uh, you have some real explaining to do. Hey, Craig, can you tell us who is on on your blacklist in terms of not going to do well the rest of the year and who's doing

who's knocking the ball out of the park. Well, I think the folks that are going to be most challenged again are the department stares and you know, it's like round up the usual suspect. JCP just had their penny, just had their announcement the other day that had you know that basically did the inventory liquidation because they were way way over inventory. May She's is having challenges, Dillerdence is having challenges. Um and those are some of the

ones that are having the most difficulties. Some of the apparel, the women's where players are are challenged. And the people that are going to do well. There are people that really sell value, and so you think value, you think at the very larger and you have companies like Costco and Walmart which you're doing great. Target is much improved, and then you have the off prices t J's, Burlington and Ross which are all very well positioned for holiday.

Craig Johnson, thank you so much for joining us. Craig Johnson, president of Customer Growth Partners, which is based in New Canaan, Connecticut. Well. In the past few weeks, CME Group announced its plans to offer a bitcoin futures contract this year, and Aaron Brown, who is a columnist for Bloomberg Profits as well as former managing director and head of financial market Research at a q R Capital Management, wrote a really compelling column where he said that this is kind of a sort

of tipping point for the cryptocurrency. He wrote, if regulators smile and clearing houses operate without problems, will find out what happens when cryptocurrency prices are exposed to real money. Aaron Brown joins us. Now, Aaron, thank you so much for joining us. The implication here is that bitcoin hasn't been exposed to real money yet. Can you explain your idea here and what you expect to happen? Sure, Lisa,

thank you for having me. UM. The cryptocurrency total market capitalization if you look across all currents a cryptocurrencies have stated at something like a hundred billion or two hundred billion dollars, but that really only represents a couple of billion real dollars people have put into it, most of those bitcoins and most of those cryptocurrencies, and incidentally, coin is maybe two thirds of that total. It's it's a

majority of it. UM either were people who got their allocations free through mining or something, or they about relatively low prices. So we don't really know if people are willing to pay two hundred billion dollars for all those cryptocurrencies, or perhaps they're willing to pay five hundred billion, or maybe they're only willing to pay ten billion. We don't really know, UM, and that's because the exchanges to this point have essentially shut out most institutional money, most big holdings.

You had to be either a PhD in computer science or you had to be a very serious UH individual to put substantial amount of money to work in cryptocurrencies. It seems possible, although we're not sure yet that in two or three months that will no longer be true and anybody can put as much money to work as easily into cryptocurrencies as they can to stocks or bonds, and then we'll finally see what these things are really worth. You own bitcoin, right, yes, yes, I have investments in

a number of cryptocurrencies. So what are you looking for To determine whether big institutions actually are interested in investing in bitcoin and putting their big money to work, well, they have to recognize it as an asset class basically, so this would mean that you know and and it would only be the more innovative pension funds, for example, might might consider doing this, but they might say we're going to put one percent or two percent of our

assets UH into cryptocurrencies um. Also, of course, a bitcoin or or or any sort of cryptocurrency e t F would allow individual investors to get in very easily, and some people are predicting that, you know, tons of money will flow in and hundreds of billions of dollars in

the price of cryptocurrencies will sore. But I think it's equally likely that we'll find out that while there is some institutional appetite and some individual investor appetite, most of it is just chasing high returns and people aren't really willing to put large amounts of money in, and and the price will fall. But whatever the new price is, it will be a real price. It will be something

where you can really buy and sell large quantities. Aaron is the increasing level of skepticism by some investors going to assure the continued rise in the value of bitcoin. You know, it's like the more the more you come up with reasons for why it really makes no sense, the greater the value of it seems. Uh yeah, that that is true. Bitcoin and cryptocurrencies in general are what we call in the financial bis, badly anchored assets with

badly anchored prices. There's really no strong fundamental reason why bitcoin should be ten dollars or a million dollars or seven thousand dollars whatever it is. Um just whenever everybody agrees that's what the price should be that's when it becomes valuable. That's how currencies work. Okay, all right, so happy dollars should be worth either, all right. So having said that, it seems that there's a philosophical thread for

bitcoin which is get away from the fiat currencies of governments. Correct. Uh, that was certainly much of the motivation for inventing it. But I think we're moving very far away from that. If we have CNY futures trading on our cbo E futures trading on bitcoin, uh, then it's not far away from the currencies. Well, but I also have to wonder erin you know, there hasn't been a way for they sayers to short bitcoin, and that has sort of removed some of the healthy aspects of a functioning market. How

much does that concern you. I don't think that's a big factor, because you'd have to be a very very brave short seller, uh to want a short bitcoin. So conceivably we'll see a bunch of people come in and and frankly, there is a way to short cryptocurrencies. You make your own cryptocurrency and sell it um. So really we've seen thousands of people do that UM and it hasn't you know, uh, drammatically pushed down the price. I don't think short selling is going to have a big

effect on the price one way or the other. That's really fascinating, PIM. I had never thought about it. But if you sell your own cryptocurrency, you're basically raising money from people who are willing to give it to cryptocurrencies without having to actually give as much back to them. I suppose that's a big short Yes. Well, having said that, UM, I kind of think that creating your own script, I think the federal government might have a little comment or

two about that. Thanks very much, Aaron Brown. He is the former managing director in the head of Financial market Research at a q R Capital Management, and he is also a Bloomberg Prophets contributor. The market has been waiting for a tax reform plan out of Washington, d C. We got it, and the response has been less than impressed. We could see that certainly in the bond market at least, yields going lower typically an indication that people are expecting

slower growth ahead. To talk about this, I want to bring in Jim Vogel Interest Rate Strategistic FTN Financial coming to us from Memphis, Tennessee. Jim, thank you so much for joining us. I'm looking at the yield curve today in the U S. I'm looking at the gap between ten ure and two year treasury yields. It is now at the narrowest since the end of two thousand and seven, in the week of the announcement of this tax reform bill.

What does this tell you? I think the market had always been anticipating that the personal taxes would be cut more than developed in the plan that we're eventually that we're looking at this week. And without those personal tax cuts, there's not going to be that sort of sugar rush next year as people um spend their share of the

accumulative one point five trillion dollars and cuts. Jim, can you just give us sort of your perspective on interest rates right now and where they would be without the vast amounts of either quantitative easing in the Added States or bond buying that's been going on in Europe. That's a tough question, but I mean, in rough terms, you probably need to think about at least twenty five to thirty five basis points higher. Uh. And the real question is going to be not whether we go up um

as that bonbuying slowly um disappears. But whether people will continue to issue a lot of debt like Apple today as rates go up in response, well, and you can add into that the tax plan because the interest that a lot of companies pay on that debt would not be deductible from taxes under that plan. So there has been speculation into the Bank of America. Mary Lynch, for example, came out today with the report saying that they expect big corporations to reduce their leverage by ten to thirty

percent in the wake of these tax changes. Do you agree with that assessment in rough terms? Absolutely, there's it depends on how there still maybe some people that can get in under the most recent test, and so there could be some people that are actually expanding their leverage to take advantage of the cap in terms of interest

rate deductibility. But um, the days of corporate issuing new debt hand over fist and just doing nothing but any leverage or at least going to calm down, both because their stock is more expensive on the buybacks and because the deductibility question is going to be an open issue maybe for the next three to five years. So Jim,

I don't understand in that context. I don't understand how yields could rise because if you have the supply of bonds getting reduced pulled back as companies issue less debt, then you have a sort of smaller supply. You've got the same amount of demand or more as retirees, Uh, save money. So wouldn't this lead to even lower corporate els It pushes down on them. Yes, But on the other hand, you've got what Tim was talking about in terms of the large amount of buying that's been done

by central banks. So it's very possible for the two to net offset. And that's why we come up with um the potential for raids to slowly drift up as the market begins to approach equilibrium. Jim, you know, one of the things that everyone talks about, it seems to be inflation with the lack thereof and uh, is it right to connect inflation with something that marks how old we are? Excess money supply growth No one even talks about, you know, M one, M two and three, men four.

I mean, no one mentions these things. But if you have access money supply growth, you get inflation. If the money supplies actually shrinking you get deflation? Do you buy that? Really?

We've not paid attention to it for so long because um velac city of money turnover um kept changing and so you can't really track relative to the monetary supply and and draw a straight line to inflation any longer for them in terms of thinking about interest rates, we are so far more focused on inflation expectations now than we ever were um uh six to eight years ago. So I'd love to get your take on the federal Reserve.

We found out today that William Dudley Built Dudley, new York Fed President, is planning to retire midyear next year. I want to start with, who do you think would be a good New York Fed President to succeed Bill Dudley. We haven't gotten that far yet, okay. UM would be fascinating though, if they brought somebody in internally that it

was already there. Because the regional Fed president choices have become more and more controversial, and with the high profile of the New York Fed, UM, it might make sense for them to consider on internal candidates rather than bring somebody with possible baggage in from the private sector. All right, Well, how important is the fact that yet another Federal Reserve president regional president is leaving after all the departures that

we've seen in all the vacancies. I mean, does this change the equation for you as a bond strategist of how to look at the way that the FED is going to approach tapering the balance sheet, et cetera next year, given the uncertainty here with the composition of the FED. Not yet, because still we see just incredible, Um, we see incredible, incredible longevity in the FED staff. UM. That's supplying a lot of the views that the governors react to.

So while Dudley has been a principal architect of recent policy and a chief salesman of the short term view of what the FED was going to be doing, uh, he replacing him doesn't really enter into our interest rate equation yet at all. Do negative interest rates in Europe and Japan enter into your equation? Uh? Guess, because they constantly make the US Treasury rates on a comparable basis that much more that they make them more um attractive.

And so anytime that we get like a run of the ten year up to forty seven, like we did at the end of October, you get a good bit of buying because the yield gap out so far versus Europe. Jim, real quick, where do you see the tenure yield going within the next six months? This is boring. We see it somewhere between two fifty. Well, that's up boring because right now it's a two thirty one, I think, so

it's not that far off. What it's saying is it's not going to move materially, and that potentially affect the way that people invest. Right give sabelly to the stock and bond markets correct, and so that that reduction of volatility also helps keep corporate spreads tied. It reduces the term premium. It just changes the basic equation that we all grew up with in terms of thinking about the long end of the bond market when the FED tightening. Thank you very much for being with us. Jim Vogel

is interest rate strategist for ft N Financial. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio