Investors in NXP Semiconductors (NXPI +1.56%) have been stuck in limbo for a full year now. Would-be buyer Qualcomm (QCOM +8.15%) has not increased its buyout bid from the original $110-per-share proposal, despite pressure from activist investor groups and regulatory challenges.
Would this be a good time to buy into NXP, hoping for a bigger Qualcomm payout or some other magical value boost? If the headline didn't give away the answer, my cynical tone might have -- no, you shouldn't buy NXP shares today. No way.
Do these pieces still fit together? Image sources: Getty Images, NXP, and Qualcomm, edited by the author.
Let's ask Qualcomm for more money!
It's true that NXP's stalled share prices can be frustrating. The stock has gained 14% after the company announced its merger with the larger mobile chip company. Over the same period, the S&P 500 stock market benchmark rose 19% higher. At times along the way, NXP shares haven't moved at all for weeks at a time. The promise of a generous payout at the end of the rainbow is starting to fade, lost behind the shadow of rising opportunity costs. For every day that passes, Qualcomm's cash offer becomes just a little less lavish.
So why shouldn't investors band together, withhold their stubs from the ongoing tender offer, and demand a larger Qualcomm check? If Qualcomm is serious about adding NXP's automotive computing business, what's another few billion dollars between friends? After all, the company has already committed to a $37 billion price tag.
But NXP shares are already trading above the agreed-upon buyout price. At $116 per share, investors have already added a cool $2 billion to NXP's market cap and enterprise value without first convincing Qualcomm to come up with that additional cash. So even if the buyout bid is increased by several billion dollars right now, much of that increase will already have been baked into the stock.
In other words, it makes very little sense to buy fresh NXP shares today even if you expect the final price tag to increase a bit.
What if the deal falls apart?
OK, so let's say that NXP investors just won't sell their shares to Qualcomm at a price the company can handle, or maybe the European Commission wants the deal to be so heavily modified that it no longer makes sense for the parties involved. Perhaps Broadcom (AVGO +4.27%) wants to buy Qualcomm without any attachment to NXP. All of these outcomes are entirely possible, though pretty unlikely. Whatever the reason, NXP goes back to running as a stand-alone business for the foreseeable future.
What then? Wouldn't the stock suddenly spring to life, unlocking the pent-up value of 12 lost market months?
Not necessarily.
NXP's recent business results have not been terribly impressive. Whether this is due to the pending Qualcomm deal distracting management from running the day-to-day operations, changing competitive pressures, or something else, top-line sales declined by 3% year over year in the recently reported third quarter. Operating income fell by 6%. NXP's margins have been stable at best.
The same goes for the stock's valuation ratios. Whether you measure NXP's worth by its earnings or cash flows, the stock is trading at roughly the same ratios it's held before Qualcomm came knocking.
NXPI Price to Free Cash Flow (TTM). Data by YCharts.
Assuming that NXP would be worth more on its own is a logical leap I can't make with these facts in mind. Moreover, crumbling mergers tend to result in plunging share prices, at least at first. Investors may eventually come around to the view that NXP really is better off alone, but you would miss a much better buy-in window along the way if you buy at today's prices instead.
Long story short, there might still be a time when it makes sense to buy NXP shares on their own, with or without a bigger Qualcomm payout. But no matter what happens, that time is not today so hold your horses.
