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China changes landscape for mergers to hit back at Trump
THERE was a time when a decent-sized merger could change the landscape for a business and the decisions rested with shareholders and boards of directors. The two companies we are looking at today, however, prove that in some important industrial sectors, global positioning has now become more important than trading logic, and politics comfortably outbids the strongest balance sheet.
The saga revolves around a proposed marriage between US chipmaker Qualcomm and the Dutch company NXP, which is in the same line of business. Plans for the get-together were going fine until the Chinese government, annoyed with US President Donald Trump’s outpourings on trade, abruptly cancelled the nuptials, precipitating a new regime for world trade.
Qualcomm is a San Diego-based semi-conductor firm with sales of $29bn (€25bn), a market value of $105bn, and net income of $2.5bn, but China is its largest market, where it derives two thirds of its revenue.
NXP, formerly known as Philips Semiconductors, has slightly less than one third of the market value and revenues of Qualcomm but its net income is almost the same, helped by higher profit margins.
Two years ago, NXP agreed to be acquired by Qualcomm for $44bn. As a smaller operator, NXP sought the safety of scale to position itself for the arrival of 5G technology.
Buying NXP made sense for Qualcomm. Sales of its smartphone chips are slowing down and acquiring NXP would boost its growth, particularly in the chip market for autos.
The deal should have been straightforward, with limited overlap between the company’s portfolios and few competitive concerns.
Qualcomm obtained regulatory clearance from eight authorities around the world, but not in China. This was seen as retaliation for the tariffs imposed by President Trump on Chinese imports. The deal fell victim to the trade war, if that is what it turns out to be.
China does not import as much from the US as it exports. So, in any trade war, it would have to consider other forms of retaliation. Computer chips are a sensitive and a strategic issue in China and its government has made no secret that it intends to develop its own sizeable capacity in that business. As things stand, China imports 95pc of its chips to make hardware like smartphones and other clever gadgets, accounting for almost one third of its total exports.
China actually spends more on imported semiconductors than it does on oil.
With the deal dead, where to now for Qualcomm and NXP? Qualcomm share price has climbed since the deal faltered; helped by the announcement that it plans a $30bn share buyback. In spite of this enormous payback, the company will come under pressure from investors. They will be looking to see if the group can diversify away from its dependence on chips for smartphones and expand elsewhere, without the promised boost from NXP.
A further blow for the company is the announcement that Apple will not use its chips in the next generation of iPhones.
On the other hand, NXP shares have plunged from the $126 bid price a share to just below $93 today as the hedge funds (with one third of the shares) unwind their positions.
The company, according to CEO Rick Clemmer, is relieved that there is clarity and certainty. He confirmed that the company will not entertain any large acquisition but it will redesign its portfolio examining smaller deals.
The failure by Qualcomm to complete the deal will trigger a $2bn termination fee, which NXP plans to return to shareholders as part of a $5bn share buyback.
Qualcomm’s defeat comes only months after it was saved from a hostile bid from a Singapore-based chip producer, Broadcomm. Mr Trump, citing national security, blocked the offer, fearing the deal could allow China overtake the US in the critical semiconductor technology.
Whatever the reason for the Chinese veto, it has changed the landscape for mergers. Investors beware.