That's it. It's over.
Qualcomm (NASDAQ:QCOM) has officially pulled the plug on its attempt to buy out fellow microchip designer NXP Semiconductors (NASDAQ:NXPI). Thus ends a takeover attempt nearly two years in the making, with just one final regulatory approval left to go. China's State Administration for Market Regulation never got around to rubber-stamping Qualcomm's papers.
So what's next for NXP?
The Dutch chipmaker originally spun out from electronics giant Philips in 2006. Ten years later, it had quietly built a market-leading position in areas such as near-field communications (NFC) chips and automobile computing, merging with American peer Freescale Semiconductor (once upon a time known as Motorola's semiconductor division) along the way. Along came chip giant Qualcomm, hoping to marry its mobile communications expertise with NXP's security and automobile solutions.
The original $38 billion deal expanded to $44 billion when major NXP shareholders grew weary of the drawn-out regulatory approval process. The two companies executed concessions demanded by antitrust reviewers in America and Europe. The application for a Chinese go-ahead expired and was refiled. Qualcomm and NXP bent over backwards to make it all happen.
But Qualcomm's turn never came at a Chinese trade desk that had become embroiled in a trade war with Qualcomm's home market, the U.S. All out of application renewals, extensions, and appeals, Qualcomm had to let the deal expire.
Okay, so where does NXP go from here?
First, Qualcomm will wire over a $2 billion breakup fee today. That's nothing to sneeze at, even if it's a bit short of a completed $44 billion buyout.
The timing of this deal expiration was such that both Qualcomm and NXP presented their latest quarterly results right alongside the event. NXP's top-line sales increased by 4% year over year, right in line with Qualcomm's revenue growth. On the bottom line, NXP's 2% growth in adjusted earnings per share couldn't hold a candle to Qualcomm's 22% boost. Furthermore, NXP's free cash flow shrunk by 21%. In other words, Qualcomm seems to come out swinging here while NXP's stand-alone business performance is less impressive at the moment.
However, three of NXP's four reporting segments posted at least 7% higher revenue. The outlier was a 9% drop in secure interface and infrastructure products, which at least partly stemmed from the loss of a major customer as Chinese mobility titan ZTE shut down operations and stopped ordering radio-frequency chips during the spring. ZTE is getting back in the game now, and one lost account shouldn't change the long-term value equation for a company as diversified as NXP.
I find it telling that NXP's third-quarter guidance points to accelerating revenue growth and expanding profit margins -- and that's before adding the $2 billion breakup fee to the net income and cash flow calculations.
Is NXP a buy now?
As expected, NXP's share price plunged on the demise of Qualcomm's buyout bid. Today, the stock is trading at a very reasonable 11.6 times forward earnings or 17 times free cash flow.
The fact that Qualcomm had to tap out after 21 months of deal-wrangling doesn't diminish NXP's value as a leader in several explosive growth markets, led by automotive computing and security solutions for mobile and embedded devices. This company will do well on its own, because modern cars rely on more and more digital tools as we head into the self-driving era, and the Internet of Things provides plenty of fuel for the security segment.
On top of all that, add in the hard-earned windfall of Qualcomm's $2 billion breakup fee, which will immediately go into a new $5 billion share buyback program.
I think you'll agree that NXP Semiconductors looks like a tasty investment on its own terms. It's time to start taking NXP seriously as a stand-alone stock again.