Qualcomm, NXP acquisition will not be easy

October 31, 2016 // By Jean-Pierre Joosting
With a view to creating a semiconductor engine for the connected world, Qualcomm Incorporated and NXP Semiconductors N.V. have announced a definitive agreement, unanimously approved by the boards of directors of both companies, under which Qualcomm will acquire NXP. Pursuant to the agreement, a subsidiary of Qualcomm will commence a tender offer to acquire all of the issued and outstanding common shares of NXP for $110.00 per share in cash, representing a total enterprise value of approximately $47 billion.

The combined company is expected to have annual revenues of more than $30 billion, serviceable addressable markets of $138 billion in 2020 and leadership positions across mobile, automotive, IoT, security, RF and networking.

However, there are some issues that need to be overcome. Qualcomm is a dominant player in the mobile space but regulators might be concerned with potential overlapping markets with NXP in automotive and IoT especially in Europe. Further, with rising protectionist sentiment, European and Asian regulators might be looking to put as many road blocks up as possible. China has a policy of building up their local markets as much as possible and Qualcomm has already had problems there. If the acquisition is allowed to pass it is likely that many parts of NXP will have to be divested as result.

Another issue is that Qualcomm is a fabless company, but NXP is not. Whether Qualcomm can maintain its fabless strategy is also in doubt given this acquisition. This could affect profitability if these fabs need significant upgrades or if utilisation rates cannot be kept high enough, or both. Further, Qualcomm is looking to combine NXP technology with their SoC expertise, which is based on a fabless concept. It will be interesting ot see how this plays out.

Qualcomm is looking at NXP's strengths, which lie in automotive, broad-based microcontrollers, secure identification, network processing and RF power. NXP also has leading positions in automotive infotainment, networking and safety systems, with products designed into 14 of the top 15 infotainment customers in 2016. Of further interest is a broad customer base, serving more than 25,000 customers through its direct sales channel and global network of distribution channel partners. However, how much divestment will take place remains an open question.

Qualcomm expects the transaction to be significantly accretive to non-GAAP EPS immediately upon close, and expects to generate $500 million of annualized run-rate cost synergies within two years after