Trump and China Are a $43 Billion Waste of Time for Qualcomm and NXP
(Bloomberg Opinion) -- After a 19-month saga in which the companies found themselves pawns in an international trade war, Qualcomm Inc.’s tortured effort to buy Dutch chipmaker NXP Semiconductors NV will be resolved this time next week — one way or another.
Back in April, the two companies set themselves a deadline of July 25 to complete the $43 billion takeover, as they awaited regulatory clearance from China’s Ministry of Commerce. That approval is still pending. While Qualcomm is based in San Diego, most of its sales are made in China. Almost 40 percent of NXP’s 2017 revenue came from the country.
It would only make sense to extend the deadline if, by some miracle, the ministry approves the deal in the next seven days and the two companies need more time to dot the i’s and cross the t’s. While there’s no doubt that a merger would benefit both companies, the risk of dragging things out for any other reason outweighs the rewards.
The deal is now entirely subject to the whims of Chinese authorities as they consider ways to respond to Donald Trump’s trade attacks. This is no longer just about antitrust considerations.
Yet with each passing month, the uncertainty for employees and customers increases. That gives rivals the opening to steal talent and business. And time is crucial here, given that much of NXP’s appeal comes from its automotive chips business. The first autonomous cars will come to market in about 2021, meaning that carmakers are ordering components now. Sales teams from NXP’s biggest rivals in this area — Infineon AG, ST Microelectronics NV and Texas Instruments Inc. — have no doubt spent the past few months hammering on the doors of NXP’s customers.
These concerns might explain why NXP trades at a discount to other chipmakers. Its shares are hovering around the $100 mark, about 15 times expected earnings for the next 12 months. That compares to the 19 times average multiple for its peers. Making sure NXP still has its eye on the automotive ball should help narrow that gap.
If the deal is abandoned, the Dutch firm will at least get a $2 billion break fee from Qualcomm. If NXP were to use that money for a buyback at the current price, it could boost earnings per share by about 5.3 percent, according to Bloomberg Intelligence analyst Anand Srinivasan. That could lift the stock price closer to Qualcomm’s $127.50 takeover offer.
And there are other potential deals out there. The logic of teaming up NXP’s automotive and industrial expertise with a mobile specialist hasn’t disappeared. Being able to package chipsets and use each others’ distribution channels would be an advantage as the Internet of Things develops. Qualcomm estimated that synergies would reach $500 million within two years from the combined $32 billion revenue company.
Broadcom Inc.’s CEO Hock Tan, who tried to buy Qualcomm, doesn’t appear to be the biggest automotive fan, but he might want to take a look nonetheless. NXP would certainly benefit from being bigger to help spread the chip industry’s soaring research and development costs.
So, unless China surprises us all over the next week, NXP should just get ready to move on from Qualcomm. It wouldn’t be the end of the world.
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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