Qualcomm appears to be free to focus on its bid for NXP now that the threat of a hostile takeover by Broadcom is gone
Now that President Trump has put an end to Broadcom’s hostile takeover bid for Qualcomm, the company is free to get back down to business. But Qualcomm still faces the same set of challenges that led it into merger talks with both Broadcom and NXP. The company’s patent licensing business is in trouble, with Apple and at least one other major customer refusing to pay. In addition, its chip business could slow down as the smartphone market matures, so Qualcomm needs new avenues for growth.
Qualcomm sees its $44 billion bid for NXP as a way to win new markets and new customers. The Dutch semiconductor maker is a leader in embedded security solutions, and its 2015 purchase of Freescale made it the world’s largest maker of automotive chipsets.
“Qualcomm looked at some of these markets and said ‘we really want to be in automotive, we want to be in IoT, but we don’t have the expertise in-house,'” explained analyst Linley Gwennap of The Linley Group. “It would be expensive to hire the right people and build the right expertise and the relationships with the customers to do that. So going out and buying a company like NXP that has established leadership and a huge customer base in these markets that Qualcomm wants to get into – I think it’s a great approach.”
It has been more than a year since Qualcomm offered to buy NXP and during that time the company has increased the offer price once and has repeatedly extended the deadline for shareholders to tender their shares. The holdup is China: its Ministry of Commerce (MOFCOM) has yet to approve the deal. Several analysts thought China was holding out in order to make things easier for Broadcom. A Broadcom purchase of Qualcomm was seen by many people (including President Trump) as a potential win for China, since Broadcom might have invested less in research and development than Qualcomm does and this could have cleared the way for China’s Huawei to take the lead in 5G research.
Now the Broadcom deal is off the table, but Huawei could still have an impact on Qualcomm’s bid for NXP. According to the Wall Street Journal , Huawei has been refusing to remit royalty payments to Qualcomm, and the two companies have recently entered settlement talks.
Analyst Stacy Rasgon of Bernstein Research thinks China’s ongoing consideration of the NXP deal could give Huawei an advantage in its negotiations with Qualcomm.
“To us Huawei would appear to have the upper hand, especially as Qualcomm awaits MOFCOM approval for NXPI,” Rasgon wrote in a research note. “Thus, we would look out for any concessions/haircuts etc Qualcomm might have to give as a condition of settlement if and when it comes.”
Rasgon’s team values Qualcomm at a lower multiple of earnings than either NXP or Broadcom, a reflection of the company’s reliance on the mobile device market. Although demand for mobile data continues to skyrocket, device sales have slowed down.
Qualcomm knows it needs new markets, and has chosen NXP as the way to get them. Now that the Broadcom threat is gone, Qualcomm just needs MOFCOM approval in order to move forward. But if Qualcomm is indeed fighting Huawei over licensing fees, it could end up making concessions on one side of its business to clear the way for growth on the other side.