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Why NXP Semiconductors, NV Soared Today

By Anders Bylund – Updated Sep 29, 2016 at 3:31PM

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An even larger semiconductor company is reportedly in talks to buy the world's fifth-largest chipmaker.

Image source: Getty Images.

What happened?

Shares of NXP Semiconductors (NXPI -1.37%) rose as much as 19.3% in Thursday's early-afternoon trading session. This jump was triggered by a Wall Street Journal report that sector peer Qualcomm (QCOM -0.91%) is working up a buyout bid for NXP.

So what?

The Journal's usual unnamed insider sources say that a merger could be announced within the next two to three months, and valued at $30 billion or more. To put that suggested price tag into perspective, NXP's enterprise value is sitting at $28.3 billion today -- including the Qualcomm report's substantial share-price boost.

For what it's worth, Qualcomm investors also embraced the NXP rumor with some enthusiasm. That stock rose as much as 8.3% on the WSJ report.

Now what?

This is still just a rumor, and far from a finalized deal. Even the WSJ admits that the talks may fizzle before the last John Hancock is added. For example, Qualcomm could find a smaller and more affordable target for its acquisitive thirst; the planned financing framework might fall apart; or regulatory hurdles could materialize in the U.S., Europe, or China.

Picking up NXP would give Qualcomm's annual revenue an instant 34% boost. The target company generates robust profits and free cash flows on its own, and would give Qualcomm's profits an upgrade from day one. And let's not forget that NXP serves hundreds of clients far beyond Qualcomm's tightly focused mobile-communications market, adding important sectors like automotive computing and a larger Internet of Things presence.

That being said, an NXP deal would also go far beyond Qualcomm's cash reserves. An already-meaty $11.8 billion debt balance would probably double or triple overnight.

In short, Qualcomm buying NXP would indeed make sense, but it would also be an enormously complex deal with plenty of opportunities to fail spectacularly. It's an interesting rumor, but don't hold your breath while waiting for an official offer from Qualcomm.

Anders Bylund has no position in any stocks mentioned. The Motley Fool owns shares of and recommends NXP Semiconductors and Qualcomm.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Stocks Mentioned

Nxp Semiconductors Stock Quote
Nxp Semiconductors
$171.06 (-1.37%) $-2.38
Qualcomm Stock Quote
$125.66 (-0.91%) $-1.15

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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