Qualcomm Nears Deal to Acquire NXP Semiconductors

Qualcomm negotiating on a price in the range of $110 to $120 per share for NXP

q1San Diego, California-based Qualcomm Inc. (NASDAQ: QCOM), a leader in wireless chip technologies, is in the final stages of negotiations to acquire Netherlands-based NXP Semiconductors N.V. (NASDAQ: NXPI). The two chipmakers may announce a deal as soon as NXP’s quarterly earnings report, which is set for October 26th, 2016, or may be delayed until Qualcomm reports results on November 2nd, 2016, as reported by Bloomberg on October 21st, 2016. No agreement has been signed so far and the outcome of the deal is not known.

Qualcomm, the pioneer of smartphone chips and the third-largest semiconductor company, is looking to establish leadership in new growth avenues such as Internet-of-Things (IoT) and the automotive industry, an area where NXP has expertise and is already an established player. Qualcomm, a supplier to major Android smartphone makers and Apple Inc. (NASDAQ: AAPL), is also trying to reduce its dependence on the slowing smartphone market, which is weighing on its topline, and find ways to sell its modems and processors for other applications such as automotives. Qualcomm’s business model is unique in the semiconductor industry in that it gets the majority of its profit from licensing technology, helping it to amass an industry-leading cash pile of more than $30 billion.

q2NXP, ranked 7th in the semiconductor industry, supplies a much broader set of industries with chips, some of which are analog. Moreover, NXP also manufactures its own chips, unlike Qualcomm which has always outsourced production. NXP, an established player in chips for the IoT, automotive, and security applications industries, could prove to be a worthy asset to Qualcomm, helping it to gain a leg-up in an intensely competitive market and against rivals such as Intel Corp. (NASDAQ: INTC) and Nvidia Inc. (NASDAQ: NVDA). For Qualcomm, it appears to be a sound decision in the light of the fact that it could take the Company years to develop such technological expertise on its own.

Chipmakers in consolidation mode

Qualcomm is now closely reviewing NXP’s finances and worldwide operations. The potential deal would be the latest in a wave of consolidation being witnessed in the $300 billion semiconductor industry, as chipmakers struggle to keep up with the rising costs of production and design, and a shrinking list of customers that are demanding more from their component suppliers.

In 2015, Singapore-based Avago Technologies Ltd., which makes semiconductors for the cellular, automotive and defense industries, agreed to buy wireless chipmaker Broadcom Corp. (NASDAQ: BRCM) for $37 billion in the biggest technology acquisition ever. With the purchase of Broadcom, the biggest maker of Wireless Fidelity (Wi-Fi) chips for short-range connections in mobile devices, Avago emerged as the world’s sixth-largest chipmaker by revenue.

Meanwhile, NXP emerged as the largest automotive semiconductor supplier with the completion of its $11.8-billion acquisition of Freescale Semiconductor Ltd. in December 2015. The merged entity, with combined revenue of over $10 billion, is the market leader in automotive semiconductor solutions and in general purpose microcontroller products. With the Freescale merger, NXP doubled the proportion of auto-related revenue to 40%, which is seen to be a huge advantage for Qualcomm in terms of gaining a foothold in the automotive semiconductor market.

Intel completed its $16.7-billion purchase of Altera Corp. in December 2015, making Intel the second-largest maker of programmable chips. Altera’s chips are used in an array of devices that include networking equipment, a field that Intel has recently focused to drive future growth.

Qualcomm’s risk-averse stance could break deal

q3Qualcomm is still negotiating on a price in the range of $110 to $120 per share, which could value NXP at or $39 billion to $43 billion, against its current market value of about $34.7 billion. The deal is now likely to be all cash.

The potential deal could still fall through as there are challenges to overcome, particularly for Qualcomm, which is known to walk away from deals at close call. Moreover, Qualcomm’s management has been known to be risk-averse and has stayed away from big purchases, or companies with different products, customers, and technology that falls outside of their focus on digital mobile phone parts.

While Qualcomm gets the bulk of its revenue from chip sales, most of its profit comes from wireless patents it licenses to the mobile industry. Earlier, the Company explored a plan to break up its chip business from its patent licensing unit after pressure from activist investor Jana Partners, but decided to remain whole.

Qualcomm’s Q3 FY16 financial highlights

For Q3 FY16, Qualcomm reported a 4% growth in GAAP revenue to $6.0 billion versus $5.8 billion in the year-ago period. Operating income jumped 29% to $1.6 billion from $1.2 billion in the year-ago period. The Company posted a 22% rise in net income to $1.4 billion, or $0.97 per diluted share, from $1.2 billion, or $0.73 per diluted share, in the prior years’ quarter.

Source: Qualcomm
Source: Qualcomm

q5During the reporting quarter, Qualcomm’s chipset business benefited from a strong new product ramp across tiers, particularly with fast growing OEMs in China.

The Company has also been aggressively reducing costs and is on track with its $1.4 billion cost reduction program.

Stock Performance

q6Qualcomm’s stock stood at $67.71, slipping 0.51%, at the close on Tuesday, October 25th, 2016, having vacillated between an intraday high of $68.25 and a low of $67.48 during the session. The stock’s trading volume was at 5,369,750 for the day. The Company’s market cap was at $99.60 billion as of Tuesday’s close.

q7NXP’s stock stood at $100.64, slipping 1.18%, at the close on Tuesday, October 25th, 2016, having vacillated between an intraday high of $101.65 and a low of $100.50 during the session. The stock’s trading volume was at 3,968,808 for the day. The Company’s market cap was at $35.77 billion as of Tuesday’s close.

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