Please ensure Javascript is enabled for purposes of website accessibility

Qualcomm's NXP Deal Faces 3 New Questions

By Leo Sun - Updated May 29, 2018 at 3:45PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

China might be changing its tune, but NXP’s investors still don’t love Qualcomm.

Qualcomm (QCOM -1.60%) announced its planned takeover of NXP Semiconductors (NXPI -0.94%) 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.

Three question marks on three pieces of colored paper.

Image source: Getty Images.

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 (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.

A boy writes "buy" and "sell" on a blackboard.

Image source: Getty Images.

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.

Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of Qualcomm. The Motley Fool recommends NXP Semiconductors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

QUALCOMM Incorporated Stock Quote
QUALCOMM Incorporated
QCOM
$147.81 (-1.60%) $-2.40
NXP Semiconductors N.V. Stock Quote
NXP Semiconductors N.V.
NXPI
$179.96 (-0.94%) $-1.70
ZTE Corporation Stock Quote
ZTE Corporation
ZTCOY

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
377%
 
S&P 500 Returns
123%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/09/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.