Last week, after about a month's worth of rumor slinging, NXP Semiconductors (NASDAQ:NXPI) agreed to an all-cash buyout by Qualcomm (NASDAQ:QCOM). Both stocks rose on the news, though Mr. Market left a bit of wiggle room for time-value arbitrage in NXP's share price.
Investors saw value for both sides in this deal, and boosted shared prices accordingly. But is that really good enough?
Was this Qualcomm takeover the right exit strategy for NXP? And what will this combination accomplish in the long run?
Let's have a look at these two key questions.
Could NXP have asked for a higher price?
NXP's share prices rose just 2% on the Qualcomm news, but the final acquisition price actually includes a fairly hefty premium. Here's how:
All told, NXP's shares have actually gained a solid 21% since the first actual reports of Qualcomm acquisition interest made the rounds. When the deal closes at the proposed $110 price per NXP share, that will represent an even stronger 34% boost overall. It's not a record-breaking buyout premium, but still a perfectly reasonable one.
Moreover, $110 per share is close to the young company's all-time highs. That record was a brief $114 intraday peak in early June of 2015, when NXP was riding high on expected demand for near-field communication chips in the recently announced Apple Watch. After that peak, NXP investors refocused on the then-pending merger with Freescale Semiconductor, and share prices fell as much as 40% over the next eight months.
You could argue that accepting Qualcomm's bid at a price that only returns to a fairly recent high equals giving up on a brighter future. The Freescale integration is still ongoing, and the benefits of that huge bet on automotive computing will take years to fully pay off. A stand-alone NXP with a razor-sharp focus on a handful of promising growth markets should command much higher prices a few years from now. From that point of view, Qualcomm is getting a bargain-bin deal here.
What's the point of this merger?
Let's move on to the second question before really answering the first one -- I'll get back to that in a minute. What will this business combination bring to the table beyond what each company could have achieved on its own?
Qualcomm CEO Steve Mollenkopf sees NXP as an accelerator of his own company's mobile innovation plans. "By joining Qualcomm's leading SoC capabilities and technology roadmap with NXP's leading industry sales channels and positions in automotive, security and IoT, we will be even better positioned to empower customers and consumers to realize all the benefits of the intelligently connected world," Mollenkopf said in the deal announcement.
From NXP's point of view, this move is about offering a complete portfolio of mobile and automotive solutions, which would be difficult to do without Qualcomm's data-moving products. "Jointly we will be able to provide more complete solutions which will allow us to further enhance our leadership positions, and expand the already strong partnerships with our broad customer base, especially in automotive, consumer and industrial IoT and device level security," said NXP CEO Rick Clemmer in the same press release.
The two visions do make sense together, driving at essentially the same end target. In short, NXP's and Qualcomm's specialties add up to a greater market opportunity than the sum of the two halves. And that's before you account for new innovation and unexpected synergies sprouting from these two research teams having easy access to each others' work.
The truth is, very few companies can offer that complete top-to-bottom vision, including networking, sensors, embedded processors, security tools, and more. Samsung and Texas Instruments come close, but I don't think anyone else is even trying to achieve that goal.
If NXP's and Qualcomm's shared dreams of a one-stop shop for automotive, mobile, and Internet of Things customers works out as planned, the new company would indeed create additional value over time. Investors must still consider execution risks and the possibility that real-world markets for these products take an unexpected turn in a new direction, but that's nothing new. These risks are always present in every business plan worth its salt.
Then we're back to that first question again: Was this really the best deal NXP could get?
The final verdict
I think these people might be onto something.
First, it's hard to see a more fitting buyer of NXP than the one actually itching to sign its John Hancock right now. Qualcomm has the scale and the product portfolio to make something happen here.
Then you have to consider the time value of taking action right now. If NXP saw serious value in a Qualcomm combination, long-term investors would be best served by striking while the iron is hot.
Yes, it's an all-cash deal, with no direct NXP ownership of the reformed Qualcomm entity, but there are simple workarounds for that problem. NXP shareholders who still want to be part of this business story can take Qualcomm's buyout check and reinvest it right away in as many Qualcomm shares as those funds might buy.
Taken together, I'm not so sure that NXP could have found a better exit strategy. We're not likely to see a bidding war because Qualcomm is far and away the best business match, and the combined beast really does look likely to deliver returns that the original two companies couldn't have reached separately.
There you go: Yes, NXP is getting a good deal here. Don't like it? Simply take the 34% buyout premium and reinvest elsewhere.