Qualcomm (NASDAQ:QCOM) has been a tough stock to own over the past few years. Its chipmaking business ceded market share to cheaper rivals like MediaTek and first party chips from big OEMs like Huawei, while its licensing business has been crushed by lawsuits, fines, regulatory probes, and the recent refusal by top OEMs to pay licensing fees.
Those developments made Qualcomm look downright toxic, but the bulls often claimed that its proposed acquisition of NXP Semiconductors (NASDAQ:NXPI), the biggest automotive chipmaker in the world, would turn things around.
By buying NXP, Qualcomm could diversify its chipmaking and licensing businesses away from mobile devices and would profit from the growth of connected and autonomous cars. Qualcomm claims that the merger would grow its addressable markets by 40%, and be "significantly" accretive to its non-GAAP earnings upon closing.
Unfortunately, several red flags now indicate that the deal could be delayed or potentially canceled.
EU regulators have stopped the clock twice
U.S. antitrust regulators approved Qualcomm's proposed buyout of NXP in April, but EU regulators have halted their review twice -- once in June and again in late August -- claiming that the companies hadn't provided key details for the deal yet. The Commission is also concerned that the merger could cause prices of NXP's Mifare technology, which is widely used in contactless chip cards, to rise.
The European Commission originally set a Dec. 6 deadline for its decision. But every time it halts the review, the deadline is extended -- meaning that the final decision could be pushed into next year. This contradicts Qualcomm CEO Steve Mollenkopf's declaration that the deal "remains on track to close by the end of calendar 2017" during Qualcomm's last conference call in mid-July.
The European Commission's decision to stop the clock is likely related to two other antitrust probes which Qualcomm faces in the EU. The first probe focuses on allegations that Qualcomm sold its internet dongles below-cost between 2009 to 2011 to cripple its rival Icera, which was subsequently acquired by NVIDIA. The second probe is weighing the fairness of Qualcomm's rebate payments to Apple for the exclusive use of its modems between 2011 and 2016.
Chinese regulators could also step in
Qualcomm could also face opposition in China, where Chinese companies have reportedly complained to MOFCOM (Ministry of Commerce) regulators about the potential merger. It's unclear if Chinese regulators will step in, but Qualcomm has a dismal track record in China.
In 2015, Chinese regulators fined Qualcomm $975 million to settle a dispute regarding its licensing fees, which the chipmaker was forced to cut for Chinese OEMs. When numerous Chinese OEMs continued under-reporting shipments to pay lower fees, Qualcomm settled the disputes on its own without the aid of government regulators.
IC Insights analyst Rob Lineback recently warned that a potential conflict over NXP in China could prompt Qualcomm to sell Mifare to a Chinese firm to appease regulators. That might satisfy Chinese regulators but anger EU regulators -- who could then stop the clock again.
Brewing demand for a higher offer
Qualcomm wants to buy NXP for $110 per share in an all-cash deal worth $38 billion. For that offer to be approved, at least 70% to 80% of NXP's shareholders must tender their shares. Unfortunately, the percentage of tendered shares fell from almost 15% in February to just over 3% in late September as investors withdrew their offers.
This indicates that investors are paying attention to activist investor Elliot Management, which owns a 6% stake in NXP and claims that Qualcomm's offer undervalues the chipmaker. In late June, Morgan Stanley analyst Craig Hettenbach said that Qualcomm could raise its bid by up to 10%. The following month, Susquehanna analysts reported that some NXP investors wanted Qualcomm to pay "up to $130 per share."
Qualcomm investors should revise their expectations
I once believed that Qualcomm could solve many of its problems by simply buying NXP. But as it turns out, that deal is anything but simple, and it seems unlikely to close by the end of the year. The stock's low valuation and high dividend might limit its downside potential, but it won't rebound unless Qualcomm management gives investors a more realistic vision of the NXP deal and its long-term future.