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1 November 2016

Qualcomm buys NXP for $47bn because it can

Qualcomm has thrown its weight around, announcing that it is acquiring NXP Semiconductor for $47bn in an all cash deal. Based in the Netherlands, NXP is the fifth-largest non-memory chip maker in the world, following its acquisition of Freescale, and has a notable lead in the automotive market.

Principally, this market position is what Qualcomm is targeting with the acquisition, and cars built today include a surprising amount of silicon – but not much which currently exists in Qualcomm’s portfolio. With NXP, Qualcomm moves into a market with some pretty solid growth potential, and diversifies from its mobile-centric portfolio.

It’s a sign of the times mostly, and one that shareholders and investors appear to agree with. Consolidation in the semiconductor industry has led to some gargantuan deals, including the previous record holder of Avago’s $37bn takeover of Broadcom last year. NXP itself had already spent $11.8bn on Freescale Semiconductor, Intel dropped $16.7bn on Altera, and ARM has recently been bought for $32bn.

These deals are reflective of an industry in which the margins on chips are getting smaller, and so the biggest players move to get even bigger in order to ensure sufficient volumes to turn a profit on those lower margins.

So the apparent facts of the matter are that Qualcomm evidently thinks that it will get a better return from investing in NXP than just leaving that cash in the bank, and that it needed to do something to shore up its place in the market. However, even when taking the long-term view, it’s hard to point to a specific area where Qualcomm looked sufficiently threatened to justify a $47bn acquisition.

Qualcomm hasn’t exactly wanted to play at the lower-end of the market, at least in its mobile SoCs. The cheaper Android phones are almost always not using Qualcomm, and opt for MediaTek or Rockchip instead. Similarly, Qualcomm has made a big deal about expanding into new IoT segments, but again at the top-end of the market, rather than the lower end – where the argument about shrinking margins holds more weight.

Drones, cameras, sensor nodes, and now the automotive industry – they’re all at a relatively early stage when it comes to chip designs, where the race to the bottom has yet to occur and Qualcomm can enter the market early and enjoy those margins.

But a lot of the chips found in cars are already at that commodity stage, and so the deal initially looks like a departure from Qualcomm’s traditional approach – where it focused on smaller numbers of customers but very large volumes (i.e. flagship smartphones shipping in volumes of hundreds of millions spread among a few dozen customers).

Sure, cars of the future are going to be much more closely integrated with consumer smartphones, especially as ridesharing gains traction and autonomous driving features mean that consumers will be able to spend more time on their phones rather than driving. This does represent a nice overlap for Qualcomm, but again, is it worth $47bn and an 11% premium on the share price, even if the claim of an addressable market of $138bn per year is correct?

NXP adds NFC expertise to Qualcomm’s core offerings, but it also adds silicon foundries to Qualcomm’s traditional fabless approach. There have been rumors that Qualcomm was interested in acquiring manufacturing capabilities, and in light of this, NXP’s scale could have been a means to an end. Currently, NXP owns seven factories in five countries, none of which could really be put to use on Qualcomm’s current portfolio.

With innovation and invention at our core, Qualcomm has played a critical role in driving the evolution of the mobile industry. The NXP acquisition accelerates our strategy to extend our leading mobile technology into robust new opportunities, where we will be well positioned to lead by delivering integrated semiconductor solutions at scale,” said Steve Mollenkopf, CEO of Qualcomm Incorporated. “By joining Qualcomm’s leading SoC capabilities and technology roadmap with NXP’s leading industry sales channels and positions in automotive, security and IoT, we will be even better positioned to empower customers and consumers to realize all the benefits of the intelligently connected world.”