China scuppers Qualcomm NXP deal

Having extended the deadline many times Qualcomm has finally bailed on its bid to acquire NXP following China’s refusal to approve it.

“We intend to terminate our purchase agreement to acquire NXP when the agreement expires at the end of the day today, pending any new material developments,” said Qualcomm CEO Steve Mollenkopf, while announcing Qualcomm’s Q2 2018 numbers. “We reported results significantly above our prior expectations for our fiscal third quarter, driven by solid execution across the company, including very strong results in our licensing business.”

At time of writing Qualcomm’s shares were up 4%, but how much of that – one way or the other – was due to the NXP announcement is unclear. Since the State Administration for Market Regulation in China (SAMR) has been sitting on the deal for months, it’s fair to assume the collapse was priced in a fair bit. Nonetheless the $2 billion termination fee Qualcomm has to shell out to NXP has got to chafe.

Qualcomm has quickly sent out a bunch of material superficially claiming to explore the reasons and consequences for terminating the deal, but actually spouting a bunch of corporate propaganda about how great everything is regardless, and how it’s going to kick ass in 5G and IoT.

It will have to do so without Apple as a customer, it seems. During the earnings call, in his pre-prepared comments, CFO George Davis said “We believe Apple intends to solely use our competitors’ modems rather than our modems in its next iPhone release.” This will be whatever comes out in September, presumably the iPhone XI or maybe even the iPhone Y. The main competitor in question is presumed to be Intel, but that choice could get interesting as we move to 5G because Qualcomm seems to have a significant head start in that area.

Back to the NXP deal, you have to wonder whether the Chinese would have waved it through if US President Trump wasn’t being so combative. The problem with trade wars is that they tend to escalate as they almost demand tit-for-tat behaviour and Trump’s intervention in the ZTE case seems to have been too little, too late for affronted Chinese leaders. They send one of ours to the hospital, we send one of theirs to the morgue, that’s the trade war way.

 

Qualcomm/NXP deal hangs in balance as US and China set out war plans

Back in 2016, Qualcomm just wanted to buy NXP in the continued quest for self-improvement, unfortunately the business has become one of the rarely moving pawns in the prolonged chess game between the US and China.

It was reported by several news outlets last week the deal had been approved, only to be shot down by Chinese authorities almost immediately afterwards, and for Qualcomm to extend the offering period of its previously announced cash tender offer to purchase all of the outstanding common shares to June 22. Just as there seems to be some promise for the Qualcomm team, the tides of war seem to draw in.

Underlying tensions between the US and China seems to be a common trend throughout the saga, as the deal increasingly looks like a bargaining chip in in rising tensions between the two nations. With only Chinese regulatory authorities left to green-light the deal, the Qualcomm management team will be nervously looking onto the horizon as the world waits for Chinese retaliation to US tariffs.

The last few weeks had seen the uncomfortable stance between the two nations ease slightly, perhaps due to President Trump’s apparent desire to save ZTE, but all the good work looks to be for nothing following the confirmation of $50 billion in tariffs on Chinese goods entering the US. China has promised a retaliation to the move, though when this will actually be remains to be seen.

This is the unfortunate position Qualcomm finds itself in. A company which can play a dominant role in the connected economy, but with fortunes in the M&A game perhaps reliant on a mature discussion between stubborn politicians. We fear for the Qualcomm ambitions.

China strikes back – reportedly wants more from Qualcomm to approve NXP deal

Qualcomm’s board benefitted from protectionism to nix the Broadcom acquisition, but is now discovering there are two sides to that game.

According to Bloomberg Chinese regulators aren’t happy with the amount of reassurance and remedies offered by Qualcomm that would somehow ‘protect’ Chinese companies if it buys NXP. This position has apparently been prompted by lobbying from Chinese firms arguing the deal could hurt them and thus should be blocked.

Now where could they have got that idea? Qualcomm’s board eventually got the Broadcom hostile acquisition blocked by complaining to regulators, who referred it to President Trump to apply the coup de grâce. Qualcomm was presumably acutely aware of Trump’s nationalist tendencies and particular distrust of China when it referred the case to the US state and it got what it wanted.

It stands to reason, therefore, that the Chinese state would feel inclined to at least return the favour and listen with a sympathetic ear to reciprocal complaints from its own companies. Chinese premier Xi Jinping, who recently promoted himself to President For Life, is a bit more subtle than Trump, but no less inclined to take a backward step.

The Bloomberg report emphasises a more positive strategic angle, that China is trying to promote domestic semiconductor champions, but that’s still protectionism by a different name. Another piece of Bloomberg analysis directly confronts the issue of M&A tit-for-tat and the fact that protectionism always escalates in a mutually harmful manner.

Qualcomm, whether it likes it or not, is right in the middle of this current escalation. Having benefitted from protectionism with Broadcom it really can’t complain about now being a casualty of it with NXP. It will be interesting to see whether there are any concessions Qualcomm can make to win over Chinese regulators or whether the acquisition will be blocked no matter what.

The Qualcomm Broadcom saga is just getting silly now

Broadcom has reaffirmed its commitment to acquiring Qualcomm by lowering an offer that had already been rejected. Yes, you read that right.

The justification for this counter-intuitive move was Qualcomm’s decision to raise its bid for NXP, to placate some NXP investors and to reflect an increase in NXP’s share price since the bid was accepted over a year ago. There was considerable speculation that Broadcom might not be cool with this development but it’s response borders on the petulant.

“Broadcom today reaffirms its commitment to acquiring Qualcomm, and is adjusting its offer following the Qualcomm board’s decision to transfer $4.10 per Qualcomm share (or $6.2 billion of value) from Qualcomm stockholders to NXP stockholders,” said the Broadcom announcement.

“Broadcom’s proposed merger agreement otherwise remains unchanged, including the $8 billion regulatory reverse termination fee and 6% per annum (net of dividends) ticking fee accruing from and after the 12-month anniversary of the date of the merger agreement.”

The release concludes with the usual hectoring tone, berating the Qualcomm board for not doing the best by its shareholders and inferring that Qualcomm has been played by NXP activist shareholders. It concludes with another call to Qualcomm shareholders to show support for the Broadcom acquisition by appointing all six of its nominees to the Qualcomm board at the imminent AGM.

Qualcomm, unsurprisingly, is unimpressed by this latest development. “Broadcom’s reduced proposal has made an inadequate offer even worse despite the clear increase in value to Qualcomm stockholders from providing certainty around the NXP acquisition,” said the Qualcomm riposte. “Broadcom has refused and continues to refuse to engage with Qualcomm on price.

“In deciding unanimously to amend its original offer, made in October 2016, the Qualcomm Board concluded that Qualcomm is far more valuable with NXP than without, and took into account the following:

  • NXP’s non-GAAP operating income has increased by 20% – which means the $127.50 per share price is actually at a lower multiple than the original deal price
  • NXP provides significant strategic benefits to Qualcomm including increased revenue diversification, substantial expansion of total available markets (TAM) and greater scale in higher growth end markets of Auto and IoT
  • The strong market dynamics and positive outlook for key segments
  • High confidence in annualized cost synergies of at least $500 million based on integration planning

“Broadcom is well aware there is no ‘reduction of value by $4.10 per share’ because the transaction could not be completed at $110.00 per share.

“The Qualcomm Board is committed to maximizing value for Qualcomm stockholders, whether that be through executing its growth strategy or selling the company. Broadcom’s revised $79.00 per share proposal materially undervalues Qualcomm, fails to take into account the strategic and financial benefits of acquiring NXP, and continues to face a long and highly uncertain path to regulatory approvals.”

The long and short of it is that the respective boards are further apart than ever, it seems, and there isn’t really much point in discussing it further until the moment of truth at the AGM. That won’t stop the two of them publicly briefing against each other to win over shareholders and it will be interesting to see what Broadcom does if the AGM doesn’t go its way.

The Qualcomm M&A plot thickens with increased NXP bid

Chip giant Qualcomm has upped its bid for NXP in a bid to placate some investors and maybe complicate Broadcom’s attempted hostile takeover.

Qualcomm’s bid for NXP back in October 2016 was accepted by the NXP board, so you’d think that would be that. But there were some grumbles from institutional investors at the time and the NXP share price has improved a further 20% or so since the bid was announced, so Qualcomm decided to up the bid from $110 to $127.50, which equates to around $6 billion.

A possible by-product of this move may be to complicate Broadcom’s hostile acquisition, which was originally based on the original NXP purchase price. Qualcomm’s board is clearly not keen on the Broadcom move and, with only China left to approve the move, presumably thinks it has an even stronger argument in favour of remaining independent with NXP on board.

“Qualcomm’s leading SoC capabilities and technology roadmap, coupled with NXP’s differentiated position in Automotive, Security and IoT, offers a compelling value proposition,” said Steve Mollenkopf, Qualcomm CEO. “With only one regulatory approval remaining, we are working hard to complete this transaction expeditiously. Our integration planning is on track and we expect to realize the full benefits of this transaction for our customers, employees and stockholders.”

“The acquisition of NXP will enable us to accelerate our growth strategy,” said Tom Horton, Presiding Director of the Qualcomm Board. “The Board unanimously believes this is an attractive acquisition at this price for Qualcomm stockholders based on NXP’s recent strong financial performance, the growth in key strategic areas such as Auto and IoT and our high confidence in management’s ability to execute upon the synergy opportunities.”

Paying more for NXP may put off Broadcom if it doesn’t think Qualcomm is getting good value for money, but that in turn may antagonise existing Qualcomm shareholders, especially the ones tempted by Broadcom’s offer. The balancing act continues and Broadcom’s next move may be critical.

Europe and Korea approve Qualcomm NXP acquisition, only China left

The protracted acquisition of NXP by mobile chip giant Qualcomm inched closer to completion with approval from Europe and South Korea.

Qualcomm first announced its bid back in October 2016, when there was still rationing, only three TV channels and you could leave your front door unlocked without any worries. In the intervening aeon a few of the required nine global regulatory bodies have got their act together enough to review the competition implications and give it the green light, but not all.

Europe, South Korea and China seemed to feel the need to drag things out a fair bit more than the rest of the world. We’re used to the EC taking its own sweet time about things but Korea probably had an extra hard look after it fined Qualcomm for some other corporate misbehaviour last year. Anyway, they got there in the end, so that just leaves China.

“We are pleased that both the European Commission and the Korean Fair Trade Commission have granted authorization of the NXP acquisition, and we are optimistic that China will expeditiously grant its clearance,” said Steve Mollenkopf, Qualcomm CEO. “Acquiring NXP is complementary to Qualcomm’s global portfolio, providing tremendous scale in automotive, IoT, security and networking and will greatly accelerate our ability to execute and create value in new and adjacent opportunities.”

There is extra intrigue attached to the China decision, however. The US has started the year with some fairly strident anti-China posturing, culminating in reports that the US state is now hinting that any companies doing business with Chinese telecoms players may find themselves losing their public sector contracts sharpish. It wouldn’t come as a massive surprise if Qualcomm found itself in the middle of a geopolitical reprisal.