Shares of NXP Semiconductors (NXPI -0.28%) moved 21.6% higher last week after The Wall Street Journal reported that Qualcomm (QCOM 1.12%) was in negotiations to acquire the chipmaker. Stocks often move higher on buyout chatter only to shake off those gains once reality sets in, but the market's buying into this as a real possibility.
NXP Semiconductors has been leaning on integrated circuits that offer a wide range of secure connectivity solutions, and it was a market darling in 2014 on the strength of its NFC chips popping up in smartphones and its "Internet of Things" positioning. The stock soared 66% in 2014. It went on to post a more modest 10% gain last year, and it was trading slightly lower this year before last week's takeover buzz.
The market likes the proposed pairing, sending shares of Qualcomm higher as well. Investors like it. Analysts dig it. The only real shock here is if it somehow falls through.
A win-win wedding
Qualcomm has cashed in on the mobile revolution, fueled by lucrative 3G/4G LTE patents that helped it develop advanced wireless tech solutions through the past few incarnations of smartphones. However, in a changing world it doesn't hurt to diversify, something that NXP itself did when it completed its purchase of Freescale Semiconductor late last year to create the top dog in automotive chips.
NXP moved higher after announcing that deal, playing up $200 million in costs savings during the first year and as much as $500 million in annual expense reductions. There's nothing official on the Qualcomm-buying-NXP front, but substantial expense-slashing synergies are likely to happen.
A couple of Wall Street pros put out encouraging analyst notes on Qualcomm following the Journal's report. They like the move to diversify from smartphones and possibly unlock its offshore cash. Mizuho upgraded Qualcomm stock on the chatter, something you don't typically see until the nuptials are officially announced. Oppenheimer's Rick Schafer feels a deal will be accretive to Qualcomm's bottom line under most scenarios. Cowen boosted Qualcomm's stock price target, excited about the potential for Qualcomm to make inroads in the automotive and industrial markets. And J.P. Morgan thinks the move makes strategic sense, something that finds the combined company leaning on the slowing mobile=chips market for just 54% of its revenue, as opposed to Qualcomm's present 84% chunk.
Most of the analysts pushing out projections for what NXP will fetch in this buyout are parking themselves north of where the stock is at now. This should give Qualcomm confidence in making a hearty bit for NXP, knowing that it has Wall Street's support. A deal should happen soon, and if it doesn't, you'll see both stocks take a hit.