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Qualcomm's New Bid for NXP Scrambles Broadcom's Plans

By Leo Sun - Feb 23, 2018 at 6:35AM

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Pressure from Broadcom forces Qualcomm to raise its bid for NXP -- but will this eleventh-hour effort work?

Qualcomm (QCOM -3.30%) recently raised its bid for NXP Semiconductors (NXPI -1.31%) to $127.50 per share in cash, up from its original offer of $110 last October. The new deal, which is worth about $44 billion, could scramble Broadcom's (AVGO -1.64%) attempted hostile takeover of Qualcomm.

Previously on Qualcomm vs. NXP...

Qualcomm previously stated that its $110 per share offer was "full and fair," but activist investor Elliot Management, which owns about 6% of NXP, claimed the Dutch chipmaker was worth at least $135 per share. Most NXP investors agreed and refused to tender their shares.

A cutaway of a smartphone with a Snapdragon chipset inside.

Image source: Qualcomm.

Only 1.5% of NXP's outstanding shares were tendered as of Feb. 9. That's well below the 80% threshold required under Qualcomm's first offer. The new deal with NXP requires just 70% of its shares to be tendered.

Qualcomm's bid also hasn't cleared all of the regulatory hurdles yet. The merger has been approved in the U.S., Europe, and South Korea, but China's MOFCOM (Ministry of Commerce) -- the last regulator required for its global approval -- hasn't cleared the deal.

Previously on Qualcomm vs. Broadcom...

Qualcomm likely raised its bid to give it more leverage ahead of its shareholder meeting on March 6, when Broadcom will put six of its nominees up for election to Qualcomm's board. If all of Broadcom's nominees are voted in, they would claim majority control of Qualcomm's 11-member board.

The move is supported by proxy advisory firm Glass Lewis, which recommended that Qualcomm investors vote for all six of Broadcom's nominees; and Institutional Shareholder Services (ISS), which recommends the election of four Broadcom nominees to pave the way toward future negotiations.

Broadcom initially tried to buy Qualcomm for $70 per share ($60 in cash, and the rest in stock) last November, in a deal worth about $105 billion. Qualcomm rejected the deal, claiming that it undervalued the company and wouldn't be cleared by antitrust regulators. Qualcomm also promised to grow its fiscal 2019 sales by about 60% while more than doubling its EPS if its investors blocked Broadcom's bid.

Broadcom returned with a "best and final" offer of $82 per share ($60 in cash, and the rest in stock) in early February, boosting the value of the deal to $121 billion. Qualcomm rejected the deal again, claiming that it undervalued the company and assigned "no value" to its planned purchase of NXP, the "expected resolution" of its licensing disputes, or its growth opportunities in 5G technologies.

Why does Qualcomm need NXP?

Qualcomm wants to buy NXP, the biggest automotive chipmaker in the world, to diversify its business away from mobile devices.

Its chipmaking business, which generates most of its revenues, faces tough competition from cheaper rivals like MediaTek and first party chips from OEMs like Apple, Huawei, and Samsung. Its licensing business, which generates most of its profits, remains besieged by regulators and OEMs that claim its licensing fees are too high.

Qualcomm is also locked in an escalating legal battle against Apple, which has suspended licensing payments to Qualcomm and could drop all of its modems from future iPhones. Analysts expect these headwinds to cause Qualcomm's revenue and earnings to drop 4% and 21%, respectively, this year.

Qualcomm's Snapdragon Automotive chipset.

Image source: Qualcomm.

Qualcomm has been diversifying away from mobile chips with chips for auto infotainment and navigation systems, drones, connected cameras, wearables, and other Internet of Things devices. By acquiring NXP, it could bundle its own Snapdragon Automotive chips with NXP's chips and become an 800-pound gorilla in connected cars.

It would also significantly expand its patent portfolio and generate licensing revenues from other connected vehicles. Qualcomm believes the merger could grow its serviceable addressable markets by about 40% to $138 billion in 2020 and be "significantly accretive" to its non-GAAP earnings.

Will the higher bid pay off?

With Broadcom approaching, Qualcomm needs to close the NXP deal as soon as possible to boost its own market value and gain the trust of its own investors -- which could keep Broadcom at bay.

But Broadcom isn't out of options yet. It recently responded by lowering its bid for Qualcomm by about $4 billion to $117 billion, claiming that it needed to do so to offset Qualcomm's higher offer for NXP. Further, it could argue that merging Broadcom and Qualcomm, then killing the NXP deal, would be more beneficial than combining Qualcomm and NXP. Broadcom could even make a rival bid for NXP, as it suggested in the past, to weaken Qualcomm's defense.

All of this drama will come to a head on March 6, so investors should mark the date and see which chipmaker comes out on top.

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Stocks Mentioned

NXP Semiconductors N.V. Stock Quote
NXP Semiconductors N.V.
$146.09 (-1.31%) $-1.94
QUALCOMM Incorporated Stock Quote
QUALCOMM Incorporated
$123.53 (-3.30%) $-4.21
Broadcom Limited Stock Quote
Broadcom Limited
$477.84 (-1.64%) $-7.97

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