Qualcomm (QCOM -0.01%) initially announced its plans to buy Dutch chipmaker NXP Semiconductors (NXPI 1.44%) in Oct. 2016. Qualcomm wanted to buy NXP, the largest automotive chipmaker in the world, to diversify its business away from the mobile market.
Qualcomm is the top mobile chipmaker in the world, but its chipmaking business is being challenged by cheaper rivals and first party chips from OEMs, while its licensing business is besieged by OEMs and regulators, which claim that its fees are unfair.
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Qualcomm believes that closing the NXP deal could counter both problems, grow its addressable markets by about 40% in 2020, and boost its non-GAAP earnings immediately. Unfortunately, Qualcomm probably can't close the deal this year for three simple reasons.
1. NXP investors aren't tendering their shares
Under Dutch law, Qualcomm needs to convince NXP's investors to tender at least 80% of their shares for the deal to close. Qualcomm initially offered $110 per share for NXP, but activist investor Elliot Management -- which owns more than 6% of NXP -- rallied against the offer and claimed that the chipmaker was worth more than $135 per share.
NXP investors followed Elliot's lead, and the percentage of tendered shares plunged from nearly 15% last February to 1.5% this February. Meanwhile, pressure mounted for Qualcomm to close the NXP deal as a defense against Broadcom's (AVGO 3.25%) hostile takeover bid.
That's why Qualcomm hiked its offer to $127.50 per share in late February, which boosted the total price to $44 billion. That higher offer satisfied Elliot Management, but other investors still weren't impressed. The percentage of tendered shares jumped to 19% in early March, but slid to 15.1% at the end of the month. As of April 13, only 16.2% of NXP's shares were tendered -- and it's unclear how Qualcomm can get that percentage to hit 80%.
2. China could delay the deal until Trump settles down
Regulators in the US and Europe have approved the NXP takeover, but China's MOFCOM (Ministry of Commerce) -- the last regulator required for the deal to proceed -- still hasn't cleared the deal.
Qualcomm already has a rocky history with Chinese regulators. In 2015, the government fined Qualcomm nearly $1 billion over its licensing practices and forced it to lower its licensing fees for Chinese OEMs. Qualcomm subsequently partnered with Chinese tech firms in the development of new chips for connected cars, Internet of Things (IoT) devices, and 5G technologies -- likely to curry the favor of Chinese regulators.
However, President Trump's decision to block Broadcom's bid for Qualcomm and levy tariffs against China could cause MOFCOM to postpone the approval of the NXP deal. This wouldn't be the first time MOFCOM delayed a major tech deal -- it sat on Western Digital's takeover of Hitachi's hard drive unit for over three years before approving it.
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If trade tensions escalate between the U.S. and China, Qualcomm's planned takeover of NXP could become a bargaining chip between Washington and Beijing.
3. Qualcomm could be taken private first
Paul Jacobs, Qualcomm's former chairman and CEO, was ousted from the board in mid-March after clashing with the board over a plan to take the chipmaker private in a $90 billion deal. However, Jacobs is still talking to strategic investors and sovereign wealth funds to take Qualcomm private.
Jacobs was a big supporter of the NXP bid, but he claimed that Qualcomm's original $110 offer was a "fair" price last September. His thoughts on Qualcomm's higher bid and Broadcom's nixed deal are less clear, but $90 billion isn't much higher than Qualcomm's current market cap of $82.5 billion, and certainly doesn't include NXP.
Jacobs' go-private bid is a long shot. However, Qualcomm's directors nearly lost control of the board to Broadcom's proposed replacements before Trump's eleventh-hour intervention, so investors might be willing to give Jacobs a shot at shaking things up. Whether or not Jacobs will still pursue NXP is anyone's guess.
The bottom line
Earlier this year, Qualcomm boldly promised that it could grow its fiscal 2019 sales by about 60% and more than double its EPS if the Broadcom bid was blocked. Qualcomm claimed that it could achieve this by settling its litigation with Apple, implementing a $1 billion cost reduction plan, and closing the NXP deal.
However, the aforementioned problems could easily push the NXP deal back to fiscal 2019 and beyond. If that happens, Qualcomm's business could sputter out as its chip sales decelerate and its licensing unit is picked apart by litigation and fines.
