Qualcomm (NASDAQ:QCOM) announced its planned takeover of NXP Semiconductors (NASDAQ:NXPI) in Oct. 2016, but the chipmaker has faced an uphill battle in getting the deal approved. NXP's investors balked at Qualcomm's initial bid, lawsuits from OEMs and regulators raised antitrust concerns, and the deal became a bargaining chip in trade talks between the U.S. and China.
Qualcomm desperately needs to close the NXP deal, since it would pivot the company's business away from the mobile chipmaking and licensing markets. NXP, the top automotive chipmaker in the world, benefits from rising demand for connected and driverless cars.
I previously predicted that Qualcomm wouldn't close the deal this year for three reasons: China's MOFCOM (Ministry of Commerce) seemed to be stalling the deal, NXP investors weren't tendering enough shares, and the chipmaker faced a go-private buyout attempt by its former chairman and CEO Paul Jacobs.
Let's check back in on the deal and discuss three new questions the deal faces.
Will China really approve the NXP deal?
On May 26, the Wall Street Journal reported that Chinese regulators could approve the NXP deal "in the next few days" -- presumably in response to the Trump Administration's decision to help Chinese telecom equipment maker ZTE (NASDAQOTH:ZTCOY) remain in business after it was hit with a seven-year ban from buying U.S. components.
In April, the U.S. Commerce Department found ZTE guilty of violating trade sanctions with its shipments of devices with U.S. components to Iran and North Korea. The Chinese government protested the ban, since it would cripple its ability to launch its nationwide 5G network. Chinese regulators subsequently suspended their review of the NXP deal in a thinly veiled retaliation.
But after the Trump Administration softened its stance on ZTE, multiple reports claimed that MOFCOM and China's SAMR (State Administration for Market Regulation) had restarted the review. Therefore, the outlook seems rosier for Qualcomm, but the deal clearly remains a bargaining chip in the trade talks between Washington and Beijing.
Why is Elliott Management reducing its stake?
Elliott Management, the activist fund that pressured Qualcomm to raise its bid for NXP, reduced its overall stake in NXP from 7.1% on Feb. 16 to 4.95% on May 22. Now that Elliott's position has dropped below 5%, it's no longer obligated to publicly disclose its positions -- and can sell its entire stake without further notice.
The decision seems strange, since NXP shares still trade at a decent discount to Qualcomm's takeover bid of $127.50 and Chinese regulators are resuming discussions.
However, a closer look at Elliott's sales actually reveal that its total number of NXP shares actually rose from 16.4 million to 16.6 million during that period. The big decline in its "overall" stake actually came from sales of derivatives -- which indicates that it's probably just winding down its option trades ahead of a potential takeover.
Why are NXP investors withdrawing their tendered shares?
Qualcomm might win over the Chinese government and NXP's biggest shareholder, but it still faces an uphill battle with NXP's other investors. Under Dutch law, Qualcomm needs about 80% of NXP shares to be tendered for the deal to clear.
Qualcomm recently revealed that a mere 4% of those shares had been tendered as of May 24, representing a big drop from 13.1% on May 10 and 12.7% on April 26. Qualcomm will likely need to raise its bid again to secure more shares.
The bottom line
Qualcomm believes that buying NXP will be "significantly accretive" to its non-GAAP earnings, while expanding its addressable markets by about 40% in 2020. But the deal remains stuck in the mud, and I doubt that it will close by the end of this year.