Qualcomm-NXP Semiconductors Merger May Get EC Nod In 2018

The EC (European Commission), the regulatory authority of the European Union, recently announced that its decision on the proposed merger between Qualcomm Inc. (NASDAQ:QCOM) and NXP Semiconductors NV (NASDAQ:NXPI) may come in 2018.

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.

In June 2017, the EC launched a thorough investigation into the proposed acquisition. The EC will conduct an in-depth probe to assess 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.

Earlier, the EC had twice halted its review of the deal -- once in June and again in August. Initially, Qualcomm had anticipated that the buyout deal would be closed by the end of 2017. 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.”

Meanwhile, 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.

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.

The takeover will also push Qualcomm up the ranks to the second position after Intel Corp. (NASDAQ:INTC) 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. (NASDAQ:AVGO) , which submitted a $135 billion (including debt) to acquire Qualcomm in Nov. 6, 2017.

Price Performance of Qualcomm

Qualcomm’s shares have gained 25.2%, outperforming the industry’s growth of 8.5% over the past 30 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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