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Qualcomm-NXP Semiconductors Deal Facing In-Depth Probe by EC


The telecom regulatory body of the European Union, the European Commission (EC), has launched a thorough investigation into the proposed acquisition of Netherlands-based NXP Semiconductors NV NXPI by U.S. mobile chipset giant, Qualcomm Inc. QCOM. The EC has a 90-working-days’ time limit, until Oct 17, 2017, to take a decision.

In Oct 2016, Qualcomm entered into a definitive agreement with NXP Semiconductor to buy the latter. Per the deal, Qualcomm will pay $110 per NXP Semiconductors share in cash reflecting an enterprise value of approximately $47 billion (equity value of $39 billion) for the Dutch chipset maker. The deal is likely to close by the end of 2017 subject to all necessary regulatory approvals. Notably, the proposed merger has already been approved by the U.S. antitrust authorities.

Interestingly, a couple of weeks ago, Bloomberg reported that Elliott Management Corp. and two other large shareholders of NXP Semiconductors have decided to approach the company to renegotiate terms of the deal, which they consider grossly undervalued. Notably, NXP Semiconductors had already announced that its shareholders had approved the company’s takeover by Qualcomm during an extraordinary general meeting of shareholders held on Jan 27, 2017.

The EC will probe in-depth whether the deal could lead to higher prices, exclusion of rival chipset suppliers and reduced innovation in the semiconductor industry. The merged entity is likely to command strong market positions with an extensive portfolio of baseband chipsets and chips for near-field communications (NFC).

NXP Semiconductors is a leading manufacturer of high-performance, mixed-signal mobile chipsets. The company has a strong clientele serving more than 25,000 customers through its direct sales channel and global network of distribution channel partners. The combined entity is expected to generate annual revenues of over $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 its non-GAAP EPS immediately upon completion. Further, the company expects to generate $500 million of annualized run-rate cost synergies within two years after the transaction closes.

Advantages to Qualcomm

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

On the other hand, NXP Semiconductors manufactures chips for next-generation automotive, industrial and Internet of Things (IoT) segments. Therefore, acquisition of NXP Semiconductors will enable Qualcomm to 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 transaction will place Qualcomm in the second position after Intel Corp. INTC in terms of sales in the broader global semiconductor market. Moreover, the combined entity will also become a formidable challenger to other large semiconductor firms like Broadcom Ltd. AVGO, Analog Devices Inc. ADI and ARM Holdings.

Price Performance of Qualcomm

Year to date, the stock price of Qualcomm has lost 11.83% compared with 1.75% gain witnessed by the Zacks categorized Wireless Equipment industry. The company is widening its presence in adjacent opportunities, including automotive, networking and mobile computing strategies, which bode well for long-term growth. Qualcomm’s Snapdragon processor is best known for its versatility in IoT applications.

However, aggressive competition in the mobile phone chipset market, stringent regulatory norms and anti-competitive charges are some of the major headwinds faced by the company. We believe that these are the reasons behind the company’s currently carrying 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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