Trade war clouds deal for NXP
Qualcomm up against deadline as China balks at sale approval.
For 21 months, Qualcomm Inc. has been trying to buy Dutch automotive chipmaker NXP Semiconductors to reduce its reliance on the slowing smartphone market.
By Wednesday, it should become clear whether those efforts were for nothing.
Qualcomm and NXP set that day as the deadline for receiving regulatory approval from China for the $43-billion deal. Chinese regulators have balked at giving the green light amid rising trade tensions with the United States.
Chinese officials still could approve the deal at the last minute, and the companies could agree to postpone the deadline.
But executives at both companies have signaled that they’re willing to walk away, Cowen & Co. analyst Matthew Ramsey said. If the acquisition isn’t approved by Wednesday, Qualcomm has agreed to pay NXP a $2billion breakup fee the next day.
Based on NXP’s Monday closing price of $105.09 a share, investors say the deal will evaporate. The stock
would be trading closer to $127.50 a share — the amount San Diego-based Qualcomm offered — if investors were confident that China would approve the deal.
“It is unfortunate Qualcomm has self-imposed this deadline,” said Ryan Shrout, head of technology consulting firm Shrout Research. “Instead of putting the impetus on the China regulatory group to make the final decision, they have to do it themselves. The market is clearly betting against it.”
Though most analysts agree that closing the deal is the best path forward for both companies, they also say shareholders are ready to move on.
“If I took a poll of 10 investors, five would be happy they might not be getting it and five would be disappointed,” said Mike Walkley, an analyst with Canaccord Genuity. “But I think all 10 would agree it’s good for the stock to get out of this twoyear purgatory. The investment community is ready for the uncertainty to end.”
It appears shareholders will get their wish. Qualcomm Chief Executive Steve Mollenkopf told the New York Times last week that if the deal doesn’t close by Wednesday, it will expire; the deadline will not be extended. “If if doesn’t get done, we also have means to create value in different ways,” he said.
Qualcomm first announced that it was buying NXP in October 2016. Antitrust regulators in eight countries have approved the merger since then. China is the lone holdout.
Problems with the approval kicked up shortly before the Trump administration announced tariffs on $34 billion worth of imports from China.
The administration’s tariffs have since expanded significantly — now targeting $200 billion worth of imports from China.
China responded with tariffs of its own on American goods. And it applied the brakes to the regulatory review of the QualcommNXP merger.
The fact that Qualcomm’s largest, most transformational acquisition appears to be in trouble in part because of the Trump administration’s tough trade stance comes just a few months after the administration stepped in to rescue Qualcomm from a hostile takeover by rival chipmaker Broadcom.
In March, President Trump signed an order that blocked Broadcom’s bid to gain control of Qualcomm’s board of directors, citing national security concerns. The rationale included fears that a Broadcom buyout would hamstring investment in advanced 5G technologies and thereby hand industry leadership to Huawei, a Chinese company.
Tensions between the two countries extend beyond trade. In April, the Commerce Department banned Chinese phone maker ZTE from buying American technology for seven years after it failed to live up to terms of a settlement imposed for sidestepping trade sanctions against Iran.
The move threatened to push ZTE out of business, but the Trump administration last month eased the restrictions to enable ZTE to resume buying U.S. technology
That raised hopes that China would move ahead with approval of the Qualcomm-NXP deal. But it hasn’t happened.
“I think it is in China’s most rational interest to approve it,” said Stacy Rasgon, an analyst with Bernstein Research. “They got ZTE. They can extract concessions from Qualcomm. If they let it go, they get nothing. But things haven’t been rational lately.”
Buying NXP would make Qualcomm less reliant on the smartphone sector, where growth has slowed.
The company also is mired in a fierce legal battle over patent fees with Apple Inc., its largest smartphone customer. Apple has stopped paying patent royalties to Qualcomm for use of its cellular technology during the dispute.
NXP makes semiconductors used for security, keyless entry, advanced driver assistance systems, mobile payment chips and a variety of other products.
Buying NXP would put Qualcomm in position to expand its cellular expertise into new industries such as connected cars, wireless healthcare devices, smart infrastructure, automated factory floors and other “internet of things” markets.
“The NXP acquisition significantly accelerates what they are trying to do in the internet of things and gives them a very strong position in automotive,” said Geoff Blaber, an analyst with CCS Insight. “There aren’t a huge number of areas where products clash. The fact that there is not much product overlap makes this a good fit.”
Folding NXP into Qualcomm would be difficult, however. The acquisition would be exponentially larger than any other in Qualcomm’s history. NXP has 31,000 employees globally — which is approxi-matelyy equal to Qualcomm’s current headcount. It owns semiconductor factories, while Qualcomm hires Samsung and others to manufacture its chips.
“Even if everything over at NXP is perfect, it is going to be a beast” to bring the companies together, Bernstein Research’s Rasgon said. “And the worry is that everything over at NXP is not perfect.”
If the deal fails, Qualcomm has pledged to use cash earmarked for NXP to buy back shares of its own stock.
Through share repurchases, which reduce share count, Qualcomm aims to achieve a $1.50-per-share gain in adjusted earnings by 2019 — which is equal to what NXP would have contributed to Qualcomm’s bottom line.
The company promised the $1.50 earnings gain as part of its pitch to investors to reject Broadcom’s hostile-takeover bid.
Some investors would prefer the buyback because it’s less risky than merging the two companies. Qualcomm could buy back $20 billion to $30 billion in stock and still have the financial flexibility to make smaller acquisitions to boost its footprint in connected cars and other non-smartphone markets.
The company already has made strides in that regard, with growing orders for in-vehicle chips and other non-smartphone products, said Shrout, the technology analyst.
“Don’t get me wrong — [Qualcomm] would be a bigger and more significant force if the NXP deal actually happens,” he said. “But I still believe Qualcomm has strong momentum in automotive and the internet of things in particular to withstand the damage” if the deal fails.