In a major relief to Qualcomm Inc. (QCOM - Free Report) , the EC (European Commission), the regulatory authority of the European Union, gave its nod for the acquisition of NXP Semiconductors NV (NXPI - Free Report) with some restrictive conditions. At the same time, South Korea’s Fair Trade Commission has also given its nod for the deal. Notably, the deal has already been approved by the U.S. antitrust authorities. Only China is left to give its approval, which Qualcomm believes it will get very soon.
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, the largest mobile chipset manufacturer would be paying $110 per NXP share in cash, reflecting an enterprise value of approximately $47 billion (equity value of $39 billion) for NXP.
In June 2017, the EC had launched a thorough investigation into the proposed acquisition. The regulator had conducted 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.
Concessions Offered by Qualcomm
Qualcomm agreed to grant rivals licenses to NXP's transport fare collection technology for eight years. The company also agreed not to take legal action against third parties related to NXP's near field communication (NFC) and secure element patents except for defensive purposes as well as for its own baseband chipset. NXP co-invented NFC chips, which enable smartphones to be used to pay for goods and store and exchange data.
Qualcomm has told the EC that it will not acquire NXP's standard essential patents as well as some nonessential patents for near-field communications services, which the Dutch company can sell to another buyer. These third-party buyers would be obliged for three years to grant others royalty-free licenses to use those patents. Qualcomm will acquire a few of NXP's other nonstandard essential NFC patents though it would also be obliged to grant royalty-free licenses to others for use of those patents.
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. Additionally, 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 - Free Report) , Analog Devices Inc. (ADI - Free Report) and ARM Holdings.
Likely Effect on Broadcom’s Hostile Bid
On Nov 6, 2017, Broadcom submitted a bid to acquire Qualcomm for a consideration of $130 billion (including $25 billion in net debt). On Nov 13, Qualcomm’s board of directors turned down the offer on grounds of inadequacy as it is currently the largest mobile chipset maker globally. Notably, Qualcomm has a market cap of around $95.4 billion against which Broadcom’s paltry $105 billion offer is quite disappointing. Also, Qualcomm is uncertain about getting regulatory support for the proposed deal.
Broadcom has since proposed replacing Qualcomm's board of directors and the matter will be put to a shareholder vote in March 2018. With NXP almost in its kitty, the enlarged Qualcomm could make it more difficult for Broadcom to take over the company.
NXP 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.
Price Performance of Qualcomm
Qualcomm’s shares have gained 31.9%, outperforming the industry’s growth of 13.6% over the past 90 days. The company currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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