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Qualcomm (QCOM) Reaffirms NXP Semiconductors Deal Closure

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At the recently concluded WSJ D. Live tech conference organised by The Wall Street Journal, Qualcomm Inc. QCOM reassured that its proposed takeover of NXP Semiconductors NV NXPI is on track. Notably, the deal was facing a few problems.

On Oct 27, 2016, Qualcomm had entered into a definitive agreement with the Netherlands-based mobile chipset giant for the latter’s acquisition. Per the deal, Qualcomm would be paying $110 per NXP share in cash, reflecting an enterprise value of approximately $47 billion (equity value of $39 billion) for NXP. The buyout deal is likely to be closed by the end of 2017, subject to all necessary regulatory approvals.

In June, the EC (European Commission), the regulatory authority of the European Union, had launched a thorough investigation into the proposed acquisition. The EC will conduct an in-depth probe to see if the deal leads to higher prices, exclusion of rival chipset suppliers and reduced innovation in the semiconductor industry. The merged entity is likely to command a strong market position with an extensive portfolio of baseband chipsets and chips for near-field communications.

The EC has time till Oct 17, 2017, to take a decision, although it has twice halted its review in the past -- once in June and again in August. Notably, the proposed merger has already been approved by the U.S. antitrust authorities.

On Oct 5, 2017, the U.S. mobile chipset giant had submitted its new proposal to the EC. According to Reuters, “Qualcomm has told regulators it will not acquire NXP's standard essential patents, which the Dutch company can sell to another buyer, the sources said. The company also agreed not to take legal action against third parties related to NXP's near field communication (NFC) patents except for defensive purposes. NXP co-invented NFC chips, which enable mobile phones to be used to pay for goods and store and exchange data."

It is important to note that in September, Qualcomm had extended the period of its previously announced cash tender offer of purchasing all the outstanding common shares of NXP. The tender offer will now expire on Oct. 20, 2017 at 5:00 p.m., New York City time.

Notably, hedge fund Elliott Management Corp. and two other large shareholders of NXP have approached the company to renegotiate the terms of the deal, which they consider grossly undervalued. In August, Elliot Management had disclosed to having accumulated shares and derivatives amounting to a 6% stake in NXP Semiconductor. Majority of the company’s shareholders are now reluctant to tender their shares at the rate specified by Qualcomm.

Consequently, NXP’s outstanding shares tendered have declined from 17.2% in March to 3.2% in September. Notably, at least 70% of NXP’s total outstanding shares must be tendered to Qualcomm for the deal to click. Hence, it looks quite unlikely to succeed unless Qualcomm adds some sweeteners.

NXP Semiconductors is the largest manufacturer of high-performance, mixed-signal mobile chipsets with 14% market share. The company has a strong clientele serving more than 25,000 customers through its direct sales channel and a global network of distribution channel partners. The combined entity is expected to generate annual revenues of more than $30 billion. Also, it is likely to position itself as a strong player in the next-generation mobile chipset segment with a potential market size of $138 billion by 2020.

Qualcomm expects the transaction to be significantly accretive to its non-GAAP EPS immediately upon completion. Further, the company expects to generate $500 million of annualized run-rate cost synergies within two years of the transaction’s closure.

Advantages to Qualcomm

The major positive of the contract is that it will enable Qualcomm to diversify its business model. The company is a leader in the mobile chipset market. However, in recent years, markets for smartphones and tablets have gradually slowed down. In addition, these chipset businesses are low-margin in nature. In fact, the company’s business has remained stagnant for the last couple of years.

On the other hand, NXP manufactures chips for next-generation automotive, industrial and Internet of Things (IoT) segments. Therefore, its acquisition of NXP will help Qualcomm diversify into highly lucrative end markets such as auto, secured devices, connectivity and secure payments. These segments offer high-margin businesses with strong potential for future growth.

The takeover will also push Qualcomm up the ranks to the second position after Intel Corp. (INTC - Free Report) in terms of sales in the broader global semiconductor market. Moreover, the combined entity will emerge a formidable challenger to other large semiconductor firms like Broadcom Ltd. AVGO, Analog Devices Inc. (ADI) and ARM Holdings.

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