China's MOFCOM (Ministry of Commerce) is restarting its review of Qualcomm's (NASDAQ:QCOM) planned takeover of NXP Semiconductors (NASDAQ:NXPI) according to Bloomberg. MOFCOM previously suspended the approval process in response to escalating trade tensions with the US.
Shares of Qualcomm rose 3% after the report on May 14, while shares of NXP surged 12% to $110.74 -- which remains well below Qualcomm's latest offer of $127.50. This indicates that many investors aren't convinced that Qualcomm can close the deal.
Why did MOFCOM resume the process?
MOFCOM initially shelved the approval process after the US Commerce Department passed a seven-year ban on sales of American components to ZTE (OTC:ZTCOY), China's second largest telecom equipment maker. ZTE was punished for violating trade sanctions by shipping devices with US components to Iran and North Korea.
That ban would cripple China's 5G expansion efforts, since ZTE needs components from American companies like Acacia Communications (NASDAQ:ACIA) and Qualcomm. ZTE uses Acacia's fiber optic components in its infrastructure upgrades, and Qualcomm's SoCs in its smartphones.
China reportedly asked the US to resolve the ZTE issue as a prerequisite for any broader trade talks. Therefore, President Trump's announcement that he was "working together" with President Xi to give ZTE "a way to get back into business" indicates that the ban might be rolled back.
Therefore, MOFCOM's continuation of the NXP approval process looks like a quid pro quo response to Trump's new position on the ZTE ban, just as the suspension of the approval process was a tit-for-tat reaction to the initial ban.
But it's not an all-clear for Qualcomm
Qualcomm desperately needs to close the NXP deal; its mobile chipmaking business faces a slowdown in smartphone sales, while its licensing business is besieged by OEMs and regulators claiming that its fees are too high. Chinese regulators notably fined Qualcomm nearly $1 billion in 2015, and forced it to lower its licensing fees for Chinese OEMs.
Buying NXP, the largest automotive chipmaker in the world, would diversify Qualcomm's business away from mobile devices and boost its total addressable markets by 40% by 2020. However, Chinese companies previously expressed concerns that the NXP takeover would extend Qualcomm's licensing business into other markets like mobile payments and autonomous driving.
MOFCOM has a history of sitting on merger approvals for a long time. For example, it mulled Western Digital's (NASDAQ:WDC) takeover of Hitachi's hard drive unit for over three years before it approved the acquisition -- and it only did so after WD agreed to let China's state-backed Tsinghua Unigroup take a 15% stake in the company. Tsinghua eventually withdrew that bid amid scrutiny from US regulators, but that mess shows how tough it could be for the NXP deal to clear MOFCOM's hurdles.
Even if MOFCOM approves the deal, Qualcomm still has to win over NXP's investors, who must tender at least 80% of their shares for the deal to close. That percentage was at just 13.1% on May 10, compared to 12.7% on April 26. Therefore, Qualcomm might need to raise its bid again to lock in more shares.
Don't hold your breath
I previously predicted that Qualcomm couldn't close the NXP deal this year, and MOFCOM's decision to restart the approval process doesn't change my outlook. Qualcomm's recent introduction of a new $10 billion buyback plan also suggests that it doesn't plan to make a big cash payment for NXP's shares anytime soon.
However, any breakthrough in the ZTE negotiations would still benefit Qualcomm, which stands to lose about $500 million in revenue (2% of its estimated sales this year) if ZTE stops buying its mobile chips. However, investors shouldn't expect those talks to directly lead to Qualcomm finally closing the NXP deal.