Will Qualcomm Sweeten Its Bid For NXP?

by Trefis Team
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Qualcomm’s (NYSE:QCOM) proposed acquisition of NXP Semiconductors has run into some obstacles in recent months. While the deal is subject to an in-depth probe by E.U. regulators, who have raised antitrust concerns, NXP shareholders have also been increasingly reluctant to tender their shares, after activist investors picked up a stake in the company, pushing Qualcomm to improve on its initial offer of $110 per NXP share. Qualcomm has indicated that the deal was on track to close by the end of 2017, but this is looking increasingly unlikely unless the company ups its bid. Below we explain why.

Trefis has a $64 price estimate for Qualcomm, which is nearly 30% ahead of the current market price.

See our complete analysis for Qualcomm

NXP Shareholders Reluctant To Tender Shares

Over the last few months, Qualcomm has come under pressure to increase its offer price. In early August, hedge fund Elliot Management disclosed that it had accumulated shares and derivatives that amount to a 6% stake in NXP, while noting that Qualcomm’s offer was too low. The fund reportedly wants NXP to either renegotiate with Qualcomm, find a better offer from another buyer or remain a standalone company. NXP’s broader shareholder base also appears reluctant to tender their shares. For instance, Qualcomm has extended its tender offer multiple times, and the total percentage of NXP’s outstanding shares tendered has declined steadily from 17.2%  in March to just 6.9% in late August. As a total of between 70% to 80% of NXP shares must be tendered for the deal to go through, the deal appears unlikely at this price point.

NXP’s stock appears to warrant a higher price. When Qualcomm announced the deal last October, its offer represented a ~34% premium for NXP’s stock prior to the deal’s announcement. However, since then, the S&P Semiconductor Select Industry Index has risen by almost 24%, with semiconductor companies catering to the auto sector (one of NXP’s core areas) faring even better. This reduces the effective premium that Qualcomm offered to NXP shareholders. The markets also appear to be pricing in the prospect of a better offer, with NXPs shares trading at $112, about $2 above Qualcomm’s offer price.

Moreover, it appears that Qualcomm has more to gain from getting the deal done than NXP does. Qualcomm’s licensing unit – which has long been the company’s cash cow – has been the subject of antitrust investigations in multiple jurisdictions causing significant uncertainty. The company is also in the midst of a legal battle with its largest customer, Apple. By closing the NXP deal, Qualcomm would be able to diversify its business away from the smartphone market towards other fast-growing areas such as the Internet of Things and automotive semiconductors. Automotive vendors have been packaging greater computing power in their cars, and the trend is likely to accelerate as autonomous vehicles become more mainstream. NXP, being the largest vendor of automotive semiconductors with a 14% market share, is likely to benefit significantly from this trend. Closing the deal could prove to be a catalyst for Qualcomm’s stock, which is down by around 20% over the past year.

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