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NXP Deal Is Likely Qualcomm's Best Defense Against Broadcom -- Update

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02/13/2018 | 05:17pm CEST
By Ted Greenwald 

In Qualcomm Inc.'s quest to avoid being swallowed by Broadcom Ltd., its best bet to remain independent may be completing its own giant acquisition. But it is running out of time.

Qualcomm has been working for more than a year to buy NXP Semiconductors NV for $39 billion. Broadcom Chief Executive Hock Tan has said his offer stands whether or not Qualcomm completes its purchase, even though NXP would add 40% to Qualcomm's revenue and give the combined companies a major presence in the fast-growing market for chips used in cars.

Last week, Broadcom raised its bid for Qualcomm to more than $121 billion from $105 billion in what would be technology's biggest deal. In rejecting the revised bid Thursday, Qualcomm accused Broadcom of ignoring the value NXP will bring, among other criticisms. The Wall Street Journal reported Sunday that Broadcom has secured as much as $100 billion of debt funding for its Qualcomm bid.

The parties are scheduled to meet Wednesday, according to a Broadcom spokesman. On Tuesday, Broadcom said it would lower the number of independent Qualcomm directors it is nominating to six, down from 11, a move it said would allow it to gain majority control while ensuring some board continuity.

Even so, Mr. Tan had presented his target with a possible way out, repeating a threat last week to withdraw if Qualcomm paid more for NXP than it originally agreed to. While Mr. Tan appeared to soften that stance on CNBC Monday, saying he would preserve his options, Qualcomm could still put Broadcom on its heels by raising its offer for NXP.

That is where things get dicey.

Qualcomm isn't likely to close the NXP acquisition until Chinese antitrust authorities have approved the deal, its last regulatory hurdle. On its recent earnings call, Qualcomm estimated it would take three weeks to wrap up the acquisition once China gave the green light, which it expected "soon." China's antitrust regulator will take a week off for the Lunar New Year starting Feb. 15, further squeezing the schedule.

Qualcomm, Broadcom and NXP all have said the price for NXP, $110 a share, is fair. But to close the deal, Qualcomm likely would have to increase the price, because NXP shares have traded above the offer price since the summer, and activist investor Elliott Management Corp. is rallying investors to demand $135 a share.

In the best case, the closing of the NXP acquisition would happen in time for Qualcomm's investor meeting, scheduled for March 6, giving it a notch on its belt before shareholders vote for either Qualcomm's directors or a slate proposed by Mr. Tan.

A three-way tango between acquirers and targets isn't unprecedented, especially in cases involving a third company lured in as a "white knight," such as the dramatic 2014 battle between Actavis PLC, Allergan Inc. and Valeant Pharmaceuticals International Inc.

There is no white knight in the Broadcom-Qualcomm-NXP triangle, but Qualcomm's completion of the NXP transaction at a higher price would fortify it against a hostile takeover, analysts said.

"I can't recall when a very large company was trying to buy another very large company, which was trying to buy yet another large company," said Mike Walkley, an analyst with Canaccord Genuity Group Inc. "Now that Qualcomm has rejected Broadcom's bid, we believe management will likely move as fast as possible to buy NXP once they receive regulatory approval."

Broadcom's sweetened offer failed to persuade investors. After Broadcom announced the offer, Qualcomm shareholders pushed shares down. The price now stands 20% below the revised offer price.

Some investors saw Mr. Tan's ultimatum as a misstep.

"You just told Qualcomm: close NXP over $110, you're off the hook," said Steven Ré, investment chief at Fairbanks Capital Management Inc. Qualcomm shares make up around 17% of the firm's equity portfolios, he said.

Broadcom declined to comment on its revised bid. Qualcomm declined to comment.

Qualcomm enters its March 6 shareholder meeting following nearly three years of turbulence that lopped 22% from its stock price, while the PHLX Semiconductor Index gained about 82%.

Shareholders can point to a litany of grievances, including billions of dollars in fines from regulators over the way Qualcomm conducts business and a price war with Apple Inc. that is keeping billions of dollars in revenue out of its coffers as multiple cases wind through courts. Securing NXP would give them confidence Qualcomm can execute its plans.

"Qualcomm needs to close NXP more than ever," said Bernstein Research analyst Stacy Rasgon, "and they'll have to offer a higher price."

Qualcomm believes an NXP merger will supercharge its opportunities in the markets for automotive chips, security and equipment outfitted with computing and communications, known as the Internet of Things -- a combined market it expects to be valued at $77 billion by 2020, according to a recent presentation to investors.

Broadcom has tried to cast doubt on the deal, saying in a recent investor presentation that NXP's average revenue growth in the first three quarters of 2017 was substantially slower than its peers, and that it missed its own forecasts. Based on projections in a late 2016 regulatory filing, NXP in fiscal 2017 fell short of its goals for revenue and adjusted profit margins.

An NXP spokesman said the forecasts at issue were "management's best-case scenarios" for presentation in advance of an acquisition.

Write to Ted Greenwald at Ted.Greenwald@wsj.com

Stocks mentioned in the article
ChangeLast1st jan.
NXP SEMICONDUCTORS NV -1.57% 89.76 Delayed Quote.-23.34%
QUALCOMM 0.38% 65.68 Delayed Quote.2.59%
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Financials ($)
Sales 2018 9 437 M
EBIT 2018 2 667 M
Net income 2018 409 M
Debt 2018 1 147 M
Yield 2018 -
P/E ratio 2018 53,88
P/E ratio 2019 37,90
EV / Sales 2018 3,54x
EV / Sales 2019 3,13x
Capitalization 32 234 M
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Mean consensus OUTPERFORM
Number of Analysts 19
Average target price 107 $
Spread / Average Target 17%
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Richard Lynn Clemmer President, CEO & Executive Director
Peter Leahy Bonfield Chairman
David W. Reed Executive Vice President-Technology & Operations
Peter Kelly CFO, Principal Accounting Officer & Executive VP
Johannes Peter Huth Vice Chairman
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BROADCOM INC-19.31%91 119