Qualcomm and NXP Semiconductors on Thursday announced that they had signed an agreement, under which Qualcomm will acquire NXP. The boards of both companies have already unanimously approved the all-cash deal representing a total enterprise value of about $47 billion. The new entity will be able to address thousands of devices and the combined expertise of both companies will be particularly important for automotive, mobile and IoT industries, which are poised for growth. The combined company will be one of the world’s largest suppliers of semiconductors in general, with revenues comparable to those of Samsung and Intel. However, it is not going to be easy to combine the assets of Qualcomm and NXP under one company.

The Biggest Semiconductor Transaction Ever

Qualcomm intends to pay $110 for every NXP share, or for $37.88 billion (according to estimates by Reuters, based on the company’s 344.4 million diluted shares as of early October), which represents around 10% premium compared to the stock price of around $98.66 at close on Wednesday. When NXP’s debt is included, the enterprise value goes up to around $47 billion in total. Last week several media outlets reported that the NXP management wanted to get $120 per share, but agreed to $110 proposed by Qualcomm. In fact, given that the NXPI stock was trading in the range between $61.61 and $107.54 in the last 12 months, $110 seems to be a rather fair price.

Qualcomm headquarters. Photo by Coolcaesar at en.wikipedia

What is interesting is that Qualcomm intends to buy NXP in an all-cash deal, which means that the company will have to borrow money, as it has around $17 billion in cash and other short-term assets its pockets today (according to U.S. regulators). Even adding in long-term securities only brings Qualcomm's piggy bank to around $30 billion in total. Qualcomm’s total debt as of today is $11.77 billion and with a new multi-billion loan (or loans) as well as NXP’s debt, its total debt will be well over $20 billion. The company does not reveal the names of its creditors right now, but it admits that it will have to borrow money to pay to NXP shareholders as well as liabilities of the company eventually.

Qualcomm and NXP intend to close the deal by the end of calendar 2017, after regulators in various jurisdictions approve the buyout. What is noteworthy is that the two companies are starting their integration effort today, well before they get all the approvals they need, which shows their confidence in the deal closing, and confirms that it will not be easy to merge the two multi-billion corporations. If everything goes as planned, the transaction valued at approximately $47 billion will be the largest semiconductor takeover ever. Last year Avago paid $37 billion for Broadcom and earlier this year Softbank bought ARM for $32 billion.

From an economics points of view, large chip-related acquisitions in the recent years are not surprising. Electronics get more complex and more expensive to develop. As a result, semiconductor companies need to expand their businesses to gain access to and volume in various existing and emerging devices. Moreover, by taking over other companies, chip developers not only get IP they need, but can also cut down certain costs and/or get rid of competitors. Finally, as companies get bigger, it gets easier for them to negotiate with their suppliers because now they need to get more goods or services.

Qualcomm and NXP: More Than the Sum of All Parts?

Qualcomm will create a rather formidable force in the semiconductor world by combining two very different companies with 72,000 employees in total. However, the giant machine that Qualcomm and NXP are going to create may be worth more than the sum of their capitalizations if everything goes according to plan.

Right now Qualcomm is the world’s largest supplier of SoCs for mobile devices and telecom equipment. Last fiscal year the company earned $25 billion in revenue: $17B from selling chips and $8B from technology licensing. In the recent years Qualcomm has been trying to diversify its business and offered various solutions for automotive, IoT, healthcare and even datacenter industries. While the company has been gradually expanding its product portfolio with various solutions, mobile SoCs has remained its bread and butter for products sold. Moreover, some of the markets and products categories hard to break into due factors such as conservative approach of manufacturers, very long development cycles, etc. For example, despite of having CPU, GPU, sensors and other IP, Qualcomm has never made into Top 10 suppliers of automotive semiconductors (according to IHS).

By contrast, NXP has been focusing on mixed-signal semiconductors as well as various specialized microprocessors and microcontrollers. NXPs chips are used inside automobiles, in healthcare equipment, NFC equipment (in fact, NXP was one of the inventors of the technology) and in hundreds of other devices. Based on data from IHS, NXP earned $9.72 billion in revenue last year.

While Qualcomm and NXP overlap in certain areas, they aren't direct rivals in any significant sense of the word; the sum of their revenues come from different markets. Therefore, the acquisition will be complementary for Qualcomm because it greatly expands its addressable markets (potentially up to $138 billion in 2020) and brings thousands of new clients (Qualcomm says that NXP serves 25K direct and indirect customers). The combined company will have revenue of well over $30 billion and will be the world’s No. 3 supplier of semiconductors after Intel ($51 billion in 2015) and Samsung ($40 billion), based on rankings from IHS. Keep in mind that Samsung sells tons of commodity DRAM and NAND flash memory, whereas the new Qualcomm will specialize on various general purpose, automotive, IoT and special purpose computing solutions. In fact, the new Qualcomm will be a rather unique company with no direct rivals of comparable sizes, as companies like Avago (together with Broadcom), MediaTek, Texas Instruments, Renesas and other earn considerably less.

During the conference call with investors and financial analysts, the management of Qualcomm and NXP emphasized multiple times that the new company will not only be able to develop unique solutions thanks to massive amount of IP available to leverage (some of which goes back to semi IP from Motorola and Philips), but will be able to address automotive and IoT industries better than its competitors. In the best case scenario, Qualcomm will be able to offer highly-integrated platforms for hundreds of emerging devices from smart wearables to 5G-enabled IoT equipment to self-driving automobiles with wireless charging, in addition to more advanced platforms for hardware we use today, such as smartphones, routers or servers. At the same time, while the management teams accentuate that the transaction is not about cutting costs or synergies, it is inevitable that there will be redundancies and optimizations. Therefore, some existing projects are expected to be cancelled (it will be interesting to see what happens to Freescale’s CPUs, for example) and some will be merged. Qualcomm predicts that two years after the two firms merge, the new company will save at least $500 million annually.

The Road Ahead

The acquisition of NXP clearly makes a lot of sense for Qualcomm, but the integration of the two companies is not going to be easy. Firstly, NXP is still integrating Freescale Semiconductor (the deal closed last December). Secondly, NXP has its own semiconductor fabs (all of which are outdated and Qualcomm has never had its own fabs). Thirdly, NXP has more employees than Qualcomm itself (45K vs 27K). Finally, the new company will have to remain very agile to remain competitive on rapidly developing markets, such as smartphones.

Executives of Qualcomm said on Thursday that the combined company would be managed by execs from both firms, who know how certain businesses work. For example, Qualcomm plans to use NXP’s sales teams to sell Qualcomm-branded devices for IoT because these people know the market and know how to address it. In the meantime, Qualcomm does not have immediate plans to get rid of NXP's semiconductor production facilities and NXP’s execs will continue to manage them. But in longer term, the company may reconsider its approach to manufacturing as Qualcomm has long based its business around being a fabless semiconductor. Overall, while the integration efforts are underway, there are things that may change between now and late 2017, when the deal is expected to close. Therefore, only time will tell how the combined company will look like and how it will be managed.

No matter how optimistic execs from Qualcomm and NXP sound today about the prospects of the merged company, it will be a very tough job to blend the two firms. Nevertheless, the importance of connected devices will only grow in the coming years (one may call it the 5G era) and therefore having the whole package of IP needed to build different kinds of devices (from water quality sensors to smart cars and smart buildings) is clearly important.

Source: Qualcomm, NXP

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  • beginner99 - Saturday, October 29, 2016 - link

    I'm convinced we will see a few companies go under due to the IoT hype not taking off as much as expected. As long as a I can buy appliances as a fridge, Washing machine and so forth without connectivity I will do it. Not to mention that these "devices" are low volume and you keep them for decades.And they don't contain a battery that fails after 2-3 years requiring you to buy a new device.

    In fact they need to invent a new device we actually to want or can make good use of. Like the smartphone was or else this will not scale.
  • StrangerGuy - Saturday, October 29, 2016 - link

    It's inevitable, commoditization of good enough tech in consumer has taken its toll even for somebody as big as Qualcomm in an absolutely huge market like smartphones (e.g like who really cares about LTE-A vs" basic LTE?) IoT, VR/AR or whatever next-fad-of-the-year is nowhere close to providing the same real-world utility of smartphones in practice, everybody is hyping all those up to hide the slowly sinking ship.
  • name99 - Saturday, October 29, 2016 - link

    You are betting against history. The initial stages of every new usage of computing have been full of hype and idiocy. Look at the garbage devices that were shipped in the mid-70s as companies tried to get onto the first PC band wagon. Look at the garbage devices shipped during the calculator boom of the same sort of period, or during the high point of the dumb-phone days.

    The point is not that most companies are incompetent and ship garbage; this has always been true, and you'll always find examples to laugh at. The point that matters is that there have also always been a few companies that weren't complete fools, and that shipped devices that were worth owning.

    IMHO the wrist computer falls into this category, and soon the speaker computer will become functional enough that it's worth having one for many people. Internet-connected cameras are already useful for many people (and will become even more so once some security standards are agreed upon, along with the equivalent of UL, or perhaps legal standards, that enforce them --- what Apple has done with HomeKit here is an interesting start and I'd love to see Android and MS put together the same sort of APIs and certification requirements). Likewise, one step at a time, health equipment is becoming smarter, starting with things like smart scales. And small items, like Automatic, are adding functionality to our cars.

    That's how it happens, one step at a time. Nothing seems to change over six months, but a hell of a lot changes over five years...
    Pointing out the problems and failures is like mocking early cars breaking down, or pointing out that early planes crashed. Yes, these happened. And so what? Look at the big picture. To assume the problems you have noticed are being ignored by ALL management, and cannot be fixed by ANY engineers, is ridiculous.
  • ddriver - Saturday, October 29, 2016 - link

    Well, today nothing comes after hype and idiocy. That's the final destination. Don't seek parallels with the 70s or 80s or 90s of the previous century, because there ain't any. Two or three decades from now people will be killing each other for drinking water and the only technology mass produced would be death machines. People have had ample amount of technology to make the world a better place for decades, yet none of that has really materialized. One step forward, two steps back, that's how it goes, the only ones getting things in their interests are the corporations, whose sole purpose is to waste precious finite resources for profit at the expense of humanity.
  • tuxRoller - Saturday, October 29, 2016 - link

    I'd take that bet if I didn't think your capital consisted solely of seeds, pur filters and rounds.
  • ddriver - Saturday, October 29, 2016 - link

    You use the term "think", yet thinkers do not bet, that's a trait typical for believers, and "believe" is the term you should have used in regard to my "capital".

    Every environment scientist who is not a "global warming" paid shill will tell you where things are going. From that every half decent economist will tell you the possible business models. Every barely decent statesman would tell you what's the place for the "consumer middle class" in that equation, had something like "barely decent statesman" actually existed.

    But feel free to buy the dumdum version - flying cars, weekend trips to Mars, robots that will do all the work without rendering you obsolete and beyond useless - a needless expense. Oh... "quantum entanglement" lol... The future holds great things for believers like you. Trust them ;)
  • Murloc - Wednesday, November 2, 2016 - link

    death machines are IoT, checkmate.
  • danjw - Saturday, October 29, 2016 - link

    I wouldn't be so sure this will be approved by regulators. If Clinton wins the White house in 10 days, it could well be blocked. At least her VP seems to be at least somewhat anti-consolidation.
  • Michael Bay - Saturday, October 29, 2016 - link

    If this monstrosity wins, it doesn`t matter, because we all die in a nuclear fire.
  • TesseractOrion - Sunday, October 30, 2016 - link

    Whereas if the other thing wins, everything will be rosy I guess?

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