Qualcomm Inc. (QCOM - Free Report) is mulling over to raise bid for NXP Semiconductors NV (NXPI - Free Report) , in order to garner support of 80% shareholders of the latter, per CNBC. Notably, on Oct 27, 2016, Qualcomm had entered into a definitive agreement with the Netherlands-based mobile chipset giant for the 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 Semiconductors. Several industry researchers have estimated that the revised price for the deal may go up to $125 - $130.
Meanwhile, hedge fund Elliott Management Corp. and two other large shareholders of NXP Semiconductors have approached the company to renegotiate the terms of the deal, which they consider is grossly undervalued. Majority of the company’s shareholders are now reluctant to tender their shares at the rate specified by Qualcomm.
With large blocks of stock held by hedge funds such as Elliott Management, Davidson Kempner, Och Ziff, Soroban Capital, Pentwater and D.E. Shaw, Qualcomm has no option but to raise offer price in order to get necessary approval from 80% shareholders of NXP Semiconductors.
Meanwhile, in January 2018, the EC (European Commission), the regulatory authority of the European Union, gave its nod for the deal with some restrictive conditions. This came in as a major relief to Qualcomm.
Advantages to Qualcomm
The major positive of the contract is that it will enable Qualcomm to diversify business model. The company is a leader in the mobile chipset market. However, markets for smartphones and tablets have gradually slowed down in recent years. Additionally, these chipset businesses are low-margin in nature. In fact, the company’s business has remained stagnant for the last couple of years.
Meanwhile, NXP Semiconductors manufactures chips for next-generation automotive, industrial and Internet of Things (IoT) segments. Consequently, its acquisition of NXP Semiconductos 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. 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. Further, 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 non-GAAP EPS immediately upon completion. Further, the company anticipates generating $500 million of annualized run-rate cost synergies within two years of the transaction’s closure.
Price Performance of Qualcomm
Qualcomm’s shares have lost 2.8%, against the industry’s growth of 5.6% over the past 90 days. The company currently has a Zacks Rank #4 (Sell). However, a better-ranked stock in this space is Motorola Solutions Inc. (MSI - Free Report) carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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