Qualcomm may get past regulatory hurdles in its $47B NXP bid
NXP is the largest semiconductor supplier, while Qualcomm use aggressive sales tactics to carve out a niche for itself.
By William McConnell & Chris Nolter
Qualcomm CEO Steven M. Mollenkopf said Thursday he expects his company's $47 billion plan to acquire NXP Semiconductors NV (NXPI) will face few obstacles winning regulatory hurdles because the two companies' products are largely complementary. And analysts following the companies agreed with Mollenkopf's stated expectation.
But not so fast. Qualcomm Inc. (QCOM) itself predicts the deal won't close until the end of 2017, largely because the transaction must be cleared in nine jurisdictions. The company would not identify the countries where it must seek approval, but the transaction will certainly get a heavy review in the U.S., Europe and China and very likely in Japan and Korea too.
Despite Mollenkopf's optimistic projection, one area where U.S. and other regulators are likely to be concerned is in the automotive sector, where NXP is the largest semiconductor supplier and Qualcomm has aggressively tried to carve out a niche for itself too.
"Both QUALCOMM and NXP are trusted partners ... in the global auto industry," Mollenkopf said.
Capturing more of the auto market also is one of the major reasons for the deal. "This is a key focus area for us and we see significant opportunity ahead as the growth of semiconductor content in cars is expected to outpace the rate of vehicle production growth itself as features proliferate from luxury vehicles more broadly through the industry."
He sees the combined company parlaying Qualcomm's leadership in Internet of Things components being combined with NXP's top position in car info-tainment systems, secure car access, body and in-vehicle networking and safety.
"Together, we have the technology and expertise to win in the next generation of ADAS [advanced driver assistance systems] and autonomous driving vehicles," Mollenkopf said during a call with analysts to unveil the deal. "We believe that the development of ADAS will be similar to that of the smartphone where the breadth of technology matters. ADAS is a rapidly developing area and with our combination, we'll be well positioned to lead as the world moves to securely connected fully automated cars."
NXP CEO Richard Lynn Clemmer added that the transaction is meant to foster "the next generation ADAS solution" by leveraging "the deep automotive domain expertise of NXP" and combining it with the "advanced" computing and connectivity capability of Qualcomm.
The Internet of Things also offers a chance to leverage each other's expertise. "NXP was very well positioned to address the demand for the next generation smart connected devices for the next few years," Clemmer added.
But Qualcomm is already dealing with competition enforcers in Europe. The EU is examining complaints about Qualcomm sales tactics allegedly aimed a foreclosing rivals' ability to compete. The company also faces a hearing in December over complaints about below-cost pricing of chips for dongles used to connect mobile devices to the Internet. South Korea and China have also sanctioned Qualcomm for its sales practices.
"This deal has been rumored for months as Qualcomm has been trying to move out of its dependence on the smartphone market and that ties into antitrust because their products are complementary," said Andre Fiebig, an antitrust partner at Quarles & Brady LLP. "Generally I see a good chance of them getting clearance on the deal. The one question is whether the deal will give Qualcomm leverage getting into automotive or industrials that allows it to preclude competition in that new market."
Fiebig said Qualcomm's Achille's Heel is its reputation of using exclusive licensing, aggressive standard-setting tactics and rebates against to dampen competitors' market share. He predicted that Qualcomm will probably agree to change some of those practices in order to clear up the EU investigation and win approval there.
Fiebig said customers worried that Qualcomm could use its size to muscle out competitors could also prolong the government reviews.
Antitrust regulators are concerned about possible harm to nascent or impending competition. Within the past two years, several deals have foundered due to regulators' concerns about lost "innovation competition." They include Tokyo Electron Ltd.'s proposed merger with rival semiconductor fabrication equipment maker Applied Materials Inc.(AMAT), Halliburton Co.'s (HAL) plan to acquire oilfield services rival Baker Hughes Inc.(BH), Comcast Corp.'s (CMCSA) plan to acquire Time Warner Cable Inc. and Embarcadero Technologies Inc.'s proposed acquisition of CA Technologies' data modeling unit.
Qualcomm is being represented on antitrust issues by Cravath, Swaine & Moore LLP partners Christine Varney and Yonatan Even.
NXP is being advised on competition matters by a Skadden, Arps, Slate, Meagher & Flom LLP team led by partners Steven Sunshine in Washington, D.C., Ingrid Vandenborre in Brussels and Maria Raptis in New York and counsel Andrew Foster in Hong Kong.
Kulbinder Garcha, analyst at Credit Suisse, said moving into adjacent markets like autos is critical to Qualcomm's effort to rely less on mobile technology for revenue. He noted that after the deal, Qualcomm says less than 50% of its revenues will come from mobile.
Jefferies LLC analyst Mark Lipacis predicted that the acquisition will face no meaningful hurdles before regulators. "We expect this deal to be approved by various regulatory agencies by the end of 2017 as the companies have largely complementary product portfolios," wrote in a note Thursday. Still, Qualcomm may have to pull in its elbows to satisfy the competition authorities.
Action Alerts PLUS, which Jim Cramer and Jack Mohr co-manage as a charitable trust, are maintaining their $110 price target on the stock. Cramer and Mohr, who added NXPI to the Action Alerts PLUS portfolio in the spring, wrote in a recent note to subscribers that "Qualcomm needs NXP more than NXP needs Qualcomm. ... In plain English, Qualcomm shareholders are telling management to get the deal done."
