Qualcomm caught between NXP purchase and new Broadcom takeover bid

NXP shareholders have piled into the stock, arguing Qualcomm’s $110-a-share offer must be improved. But they’re getting frustrated as Qualcomm has yet to open negotiations on raising the bid, according to people familiar with the process who asked not to be identified because the discussions are private. A positive earnings report by the Dutch company could bolster their argument that Qualcomm’s bid is low.
At the same time, Qualcomm must still satisfy Chinese regulators to move the deal ahead.

China’s Ministry of Commerce, the only major jurisdiction that hasn’t yet approved the NXP deal, is waiting for Qualcomm to offer up enough concessions to win approval, according to people familiar with the process. The agency has received concerns from domestic companies that Qualcomm may raise technology royalty fees in areas such as mobile payments and that the combined company could make it harder for local chipmakers to grow, said the people, asking not to be identified because the matter is private.

The Ministry of Commerce didn’t immediately reply to a faxed request for comment. Progress on the NXP deal could determine the final outcome for stakeholders in all three companies. Part of Qualcomm’s rationale for rejecting Broadcom’s $105 billion offer is that NXP will help it expand into lucrative new markets. That growth potential would suggest that Broadcom’s bid, which would be the biggest technology deal of all time, currently undervalues Qualcomm. Still, Qualcomm’s board members, who could be replaced in a March shareholder vote, don’t want to be seen as paying too much for NXP.

Part of Qualcomm’s rationale for rejecting Broadcom’s 5 billion offer is that NXP will help it expand into lucrative new markets. (File Photo)

A Qualcomm spokesperson said the company doesn’t “comment on speculation,” but that it is looking “forward to expeditiously closing the transaction” with NXP.

Criticism Mounts
Meanwhile, NXP investors are starting to grouse more publicly about the offer from San Diego-based Qualcomm. A run-up in chip stocks has raised the price of some of NXP’s peers and emboldened some of its investors to demand more.

“NXP shares are undervalued relative to the $110 Qualcomm offer and the current trading price,” said a representative for HBK Investments LP, one of the Dutch company’s top four holders. “We believe strongly that a revised Qualcomm-NXP deal would be beneficial for Qualcomm shareholders. We believe that the clearing price is in excess of $135 per NXP share.”

Activist investor Paul Singer’s Elliott Management Corp, another top-four investor, has also pushed for more than $135 a share. At the current offer price, Qualcomm needs the support of investors holding 80 percent of NXP’s stock to tender their shares. NXP is currently trading at around $120.

Earnings Complication
Negotiations to persuade NXP shareholders may become more difficult after it reports earnings on February 7. If NXP shows it’s getting a lift from increased demand from automakers – like peers Texas Instruments Inc and Maxim Integrated Products Inc – investors may feel further emboldened to insist on a bigger payout.

Since Qualcomm announced the NXP acquisition in October 2016, the Philadelphia Stock Exchange Semiconductor Index has gained 67 percent while the deal was been dragged through regulatory scrutiny. The index has already gained 10 percent this year.

To win the European Union’s conditional approval, Qualcomm, the largest maker of chips that help run smartphones, pledged not to acquire NXP’s standard essential near-field communication patents and some non-standard essential NFC patents. It will also maintain current licensing terms for NXP’s Mifare technology, used in swipe cards for the London Underground, for an eight-year period, and will ensure NXP chips remain interoperable with others.

Broadcom will also be involved in nominating members to Qualcomm’s board of directors in March. (File Photo)

Yet Qualcomm can only concede and pay so much. Management can’t afford to anger its own shareholders ahead of its March 6 annual meeting, where investors will vote on whether to replace the board with a slate nominated by Broadcom. This month, Qualcomm promised that if the NXP deal falls through, it would buy back enough shares to offset the lost “value creation” that would have been realized from combining the companies.

Buyback Pledge
The repurchase pledge, while reassuring NXP’s shareholders and the market at large that Qualcomm has a contingency plan, has left some scratching their heads. “We see some false equivalence here,” Bernstein analyst Stacy Rasgon wrote in a note to investors. “Buying back a large amount of stock does not address the strategic issues that NXPI was supposed to fix.”

Perhaps more important to Qualcomm’s argument for independence will be its own fourth-quarter performance and outlook set to be released January 31. That may be a final opportunity to show shareholders that it’s on track and can resolve issues that have dragged down earnings and weighed on the share price since late last year.

Those results will also be the jumping off point for any increase in Broadcom’s bid for Qualcomm – a move that will likely happen after the suitor sees what the chipmaker has to say, according to people familiar with its plans.