Qualcomm-NXP Semiconductors Could Create A Behemoth In The Automotive Semiconductor Space

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According to a report by Wall Street Journal, leading chipset maker, Qualcomm (NYSE:QCOM) is reportedly in talks to acquire NXP semiconductors, in a deal likely be valued at  more than $30 billion. This could be potentially the largest acquisition in Qualcomm’s history. Though there is no official press release from either of the company, stock price of both Qualcom and NXP surged following the acquisition report, by 6% and 17%, respectively. In this analysis, we investigate the reasons as to why it makes sense for Qualcomm to acquire NXP Semiconductors.

Qualcomm To Gain An Edge In The Automotive Semiconductor Market

NXP Semiconductors is  a leading provider of High Performance Mixed Signal (HPMS) and Standard Product (SP) semiconductor solutions, which respectively account for 85% and 13% of the business. Mixed signal devices are so called because they comprise both analog and digital circuits, typically engineered together to achieve a specific application. NXP focuses on designing high performance devices used in automotive (36% of revenues), secure identity (9%), secure connectivity (22%), secure interface and infrastructure (18%) applications. Standard Products (13% of revenues) comprise and range of basic circuits, including diodes, thyristors, rectifiers and transistors.  The company manufactures  the bulk of its products and possesses a range of CMOS, radio-frequency, mixed-signal and analog process capabilities.  The possible acquisition of the company would significantly diversify Qualcomm’s offering and provide it an entry into multiple markets outside its core mobile chipset business. Further, it must be noted that NXP Semiconductors acquired Freescale Semiconductor for over $10 billion in 2015, as a result of which, it became the largest semiconductor supplier to the automotive industry. The companies were originally the captive semiconductor businesses of Philips and Motorola, respectively.

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Given that Qualcomm is also targeting the automotive infotainment market with its family of advanced processors, a potential acquisition of NXP semiconductor should help the company become the largest supplier of chips used in cars. Qualcomm’s existing automotive solutions equips the cars with features that include:  1) advanced smartphone quality connectivity; 2) 3D connected navigation support: 3) facial and voice recognition features that personalize car settings; 4) wireless device charging;  and, 5) parking assistance features.

As more and more customers look for improved digital experience in the car, in addition to other parameters, car companies are banking on technological advancements in their interiors to compete with each other. This has led to an exponential increase in the semiconductor content per vehicle. The growth in the semiconductor content in automotives is likely to further increase with the rise in autonomous car market. According to a research by Boston Consulting Group, the autonomous car market could be a $42 billion market by 2025, which could be around 12-13% of the total auto market. [1]

The Semiconductor Industry Is Undergoing A Wave Of Consolidations

Demand for cheaper chips and a surge of new products – from PCs to smartphones to the Internet-of-Things (IoT) – has intensified competition in the semiconductor market, which in turn has put downward pressure on chipmakers’ bottom line. As a result, the semiconductor space has seen a number of consolidations recently and is likely to see some more in the near future. The acquisition of NXP semiconductors could be one of the largest acquisitions in the semiconductor space happening in recent years. Further, the acquisition should help Qualcomm improve its bargaining position with customers.

Tax Advantage For Qualcomm

Qualcomm has cash worth $31 billion on its balance sheet, almost all of which is outside the U.S., according to Wall Street Journal. Though the U.S has third highest general top marginal corporate income tax rate in the world at 39.1 percent, its corporate tax law allows U.S. companies not to pay taxes on foreign profits, if the income was to remain outside the U.S. forever. This provides another incentive for Qualcomm to acquire NXP Semiconductors. This comes from the fact that NXP semiconductors is a Dutch company, and Qualcomm can use its cash stashed outside the U.S. to fund the acquisition.

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Notes:
  1. The Autonomous Vehicle: The Car of the Future, Boston Consulting Group Report, April 2016 []