Europe Needs Chip Deals, and Xi's Made Them Harder

(Bloomberg Opinion) -- You'd think the semiconductor industry would be breathing a little more easily now that global trade tensions have eased, but a closer look at the rapprochement reveals a hitch. It could make it harder for European chipmakers to overcome their structural disadvantages.

Chinese President Xi Jinping seems to be making the right noises, after reportedly saying that he’d now consider approving a prospective Qualcomm Inc. acquisition of NXP Semiconductors NV. Sure, the premier is more than a little late in granting his assent – the deal was scuppered in July after 21 months of waiting, a victim of procrastination by the Chinese regulator in response to the U.S. trade dispute. And Qualcomm was quick to rule out any chance of a return. But let’s not quibble. The main point is that, at long last, the political winds have changed.

But that’s the problem, and it’s a serious one. Xi's statement makes it clear that the motivation for China's stalling was political, not regulatory. The "temporary cease-fire" he and Trump arranged over dinner at the Group of 20 talks in Buenos Aires is hardly a cast-iron guarantee of stability in cross-border transactions.

That sort of uncertainty poses a worrying risk to dealmaking – any future acquisition will be beholden to the whims of the two leaders.

It leaves European chipmakers in an incredibly difficult position. They are, on the whole, smaller than their U.S. rivals. Consolidation would make it easier to achieve the scale which would help them compete.

The collapse of the Qualcomm bid left NXP in play. Meanwhile, the rise of autonomous and connected cars in the coming decade should create a surge in semiconductor demand from the automotive industry. NXP has an enviable presence in the market, and long-established customer relationships. That makes it appealing to potential suitors.

However, the likelihood that it will receive an approach from another U.S. firm is now much reduced. Sure, it could appeal to any number of American chipmakers, from Intel Corp. to Analog Devices Inc. But since China's objection to the Qualcomm deal had very little to do with the the company specifically, and a whole lot to do with its nationality, any new U.S. bidder would also be exposed to Xi’s whims. Firms would be ill-advised to shoulder the risk of a deal being killed: Qualcomm had to pony up a $2 billion break fee when it finally walked away.

Instead, it places the onus squarely on the shoulders of NXP and its European peers, Infineon Technologies AG and STMicroelectronics NV, to find a solution that would improve their scale. All three companies are considerably smaller than the biggest U.S. and Asian giants, and consolidation could boost their profitability.

Infineon and NXP might be a difficult fit. They are already the two biggest semiconductor suppliers to the automotive industry, so would raise more competition concerns than might a tieup with STMicro. There has also historically been tension between the two firms' executives. Their approach differs too: while Infineon generally owns its own manufacturing facilities, NXP outsources more production.

Although a tie-up of NXP and STMicro might be more complementary, there are also significant hurdles, not least the 28 percent stake controlled jointly by the French and Italian governments. French political opposition killed a mooted acquisition by Infineon of STMicro last year.

Furthermore, STMicro doesn’t have the financial means to acquire either NXP or Infineon. Even without a premium, NXP’s market capitalization represents almost 13 times STMicro’s earnings before interest, taxes, depreciation and amortization, rendering a debt-funded deal impossible. A large equity component is unlikely because the French and Italian governments seem unwilling to dilute their stakes. They would need to invest new capital to facilitate a deal.

Unless the European firms can overcome their differences, it looks like they are condemned to going it alone, no matter what Xi says.

--With assistance from Brooke Sutherland.

To contact the editor responsible for this story: Jennifer Ryan at jryan13@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Alex Webb is a Bloomberg Opinion columnist covering Europe's technology, media and communications industries. He previously covered Apple and other technology companies for Bloomberg News in San Francisco.

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