Trump's China Fight Chills Tech Deals With Death of Qualcomm-NXP
(Bloomberg) -- Don’t expect a technology M&A resurgence until Donald Trump’s escalating trade war with China cools off.
Qualcomm Inc.’s $44 billion takeover of NXP Semiconductors NV -- a two-year-old deal that got trapped in the escalating tariff spat -- is dead. The transaction had been anointed by regulators globally, except in China. The Chinese agencies responsible for vetting mergers had even signed off on it, people familiar with the matter have said, but final authorization was never given by the government.
Technology companies, especially semiconductor makers and other hardware businesses, had been waiting for the Qualcomm-NXP deal to close before deciding whether to embark on their own acquisitions, according to industry advisers.
As the world’s biggest market for chips and smartphones, China rates as perhaps the world’s most significant regulator of tech hardware. Executives don’t want their transactions to become the next pawn in the U.S. trade war with China, so they’re approaching situations involving Chinese regulatory approval with caution.
“It certainly raises concerns about future M&A,” said Michael Walkley, an analyst at Cannacord Genuity Inc. “There’s increasing uncertainty in how long the issues with China will last and if they’ll continue to block deals.”
Meanwhile, technology and infrastructure sector deals will face even more scrutiny by the U.S. regulatory body that reviews foreign transactions, according to Bloomberg Intelligence. The powers for the Committee on Foreign Investment in the U.S., or CFIUS, will be expanded under a bill that Congress is expected to pass in August.
The act will also make the grounds for blocking deals more expansive, including considerations such as cybersecurity, and give the president broader authority to halt takeovers. Trump has already barred two semiconductor takeovers by foreign acquirers.
Uncertainty is a drag on dealmaking, and the Trump administration’s interactions with China have at times been difficult to interpret. In a surprise tweet in May, Trump walked back penalties against Chinese telecom company ZTE Corp. that had been imposed by the U.S. Commerce Department.
It wasn’t clear whether the department was involved in Trump’s ZTE decision. Lifting the sales ban on ZTE was a key demand by China in broader talks to avert a trade war. The dispute escalated this month with Trump saying he’s prepared to slap tariffs on all Chinese imports.
For potential acquirers, unconsummated deals can be expensive. In Qualcomm’s case, it’s on the hook to pay Netherlands-based NXP a $2 billion breakup fee. Without the deal, San Diego-based Qualcomm now plans to spend as much as $30 billion of its cash pile on buybacks to appease investors.
Just $28.3 billion of deals involving U.S. tech targets and overseas buyers have been announced since the start of 2017, with Atos SE’s $3.6 billion acquisition of Syntel Inc. the largest on file.
Instead, deal-hungry companies seem to be sticking to domestic transactions. More than $160 billion of tech deals between U.S. companies have been announced during the same period, including Broadcom’s $18.1 billion bid for CA Technologies Inc. and Microchip Technology Inc.’s $9.8 billion purchase of Microsemi Corp.
Even bigger deals have fallen apart. On top Qualcomm’s thwarted purchase of NXP, the U.S. semiconductor maker was also the target of a $117 million hostile takeover attempt from Broadcom Ltd. In March, Trump blocked the transaction on national security grounds over fears it would reduce investment in chip and wireless technology in the U.S. and hand leadership of the industry to Chinese competitors.
This month, after redomiciling to the U.S., the ever-acquisitive Broadcom bought fellow U.S. resident CA Inc. -- a company outside of its core competency -- in an $18.9 billion transaction that doesn’t require Chinese approval.
In September, Trump stopped the sale of Lattice Semiconductor Corp. to a Chinese-backed investor in what was then only the fourth time in a quarter century that a U.S. president had blocked a foreign takeover of an American firm on national security grounds. At least a half-dozen technology deals have collapsed during the Trump administration in the face of concerns raised by CFIUS.
Qualcomm Chief Executive Officer Steve Mollenkopf said he didn’t expect U.S. tensions with China to change meaningfully in the near future, which led to his company’s decision to drop the deal. On a call with analysts Wednesday, Mollenkopf said he remained a fan of the NXP transaction and the logic behind it, though it wasn’t clear whether the outcome signaled any difference in whether Qualcomm could pursue other deals.
“We didn’t see an end to the process, or near-end end to the process,” he said in an interview. “So we had to move on.”
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