The Commission's investigation started in late April and has now passed through preliminary review. Here's what you need to know about this regulatory update -- and what it means for NXP and Qualcomm investors.
The European Commission has taken a first sniff at the Qualcomm-NXP merger and released a slate of preliminary concerns with the deal. The clock is now ticking on a yea-or-nay vote for the merger as a whole, due no later than Oct. 17. By that date, Qualcomm must either explain why the issues raised by the Commission won't hurt European consumers or take steps to address each remaining issue.
Three main issues were brought forward in this official notification:
- The merger would combine two companies with a significant business in the emerging market for automotive semiconductors, particularly in the field of vehicle-to-everything communications. Reducing competition in this market segment would arguably be bad for European consumers.
- The new company would also dominate the related markets for baseband radio chips and near-field communications (or NFC) controllers. That would give Qualcomm-NXP "the ability and incentive" to lock out rival suppliers from these important smartphone-component markets via product bundling.
- Furthermore, the Commission worries that NXP's industry-standard NFC technologies could become bundled with Qualcomm's patent portfolio in an anticompetitive way. Separate from the product-bundling problem, this concern has to do with licensing and royalty payments for fundamental technologies under NXP's wing.
Is this a big deal?
The European Commission's review is one of the last hurdles left to clear before the final merger papers can be signed. Qualcomm and NXP have every incentive to address these concerns in a clear and effective manner, and will bend over backwards to get it done.
Qualcomm's management doesn't seem overly worried about a regulatory stop sign here.
"This acquisition is complementary, and driven by the belief that the combined efforts of the two companies will produce even greater innovation than they would alone," the company said in a statement that was emailed to several news outlets. "This significant investment by Qualcomm will help our industry partners in the automotive, IoT and security sectors advance their digital transformation and further the digitization of industries worldwide."
The company promised to work with regulators to address their concerns, and continues to expect closing the deal by the end of 2017.
I wouldn't worry too much about the automotive-competition issue. Yes, NXP is the top supplier of automotive semiconductors, bar none, which is exactly why Qualcomm is so interested in owning the company. But NXP has just 14% of an extremely fragmented market, and Qualcomm is not among the 10 largest vendors today. The combined company would surely be a leading player in this exploding market, but far from a dictator.
The other two bullet points will require further explanation, a few black-and-white promises, and maybe even business concessions such as spinning off some smaller product lines or operations before closing the deal. Qualcomm has a history of anticompetitive issues, including a $975 million fine from Chinese authorities in 2015, an $853 million fine from South Korea last December, and an ongoing investigation of its business practices by the European Commission.
None of this changes NXP's value to investors, which is not expected to change much before the Qualcomm merger closes. Pressure from activist investors to ask for a larger price tag doesn't seem to have found much traction with NXP's leadership, and even an adjusted deal would still hew close to the promised $110 per NXP share.
Qualcomm shares may stand to lose some short-term value as the European Commission works out its beef with the company. But whatever concessions regulators might squeeze out of the NXP deal would pale in comparison to the growing laundry list of regulatory fines. The Commission has previously sought damages as high as $2.5 billion, which would be more than the combined fines Qualcomm paid to South Korea and China.
All in all, this is more of a speed bump than a roadblock. Qualcomm will do whatever it takes to close the NXP acquisition on schedule. You can bet on that.