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Qualcomm’s $44bn NXP buy is killed, geo-politics a likely culprit

It had looked like a troubled deal for quite some time, but now it is official. Qualcomm has canceled its $44bn takeover of NXP, the Dutch chip specialist that Qualcomm had eyed up for its IoT expertise. NXP is getting a $2bn exit fee, and Qualcomm is now kicking off a $30bn share buyback program. This was the largest IoT acquisition, eclipsing SoftBank’s $32bn purchase of ARM, but now it’s been canned.

Rising tensions between the US and China will have played a part in China’s reluctance to hand over approval for the deal. The US and EU very quickly announced their consent, but China always seemed wary. There have been other IoT deals blocked on these concerns, although usually it is the US denying Chinese investment firms the rights to US companies, as was the case with Canyon Bridge buying Lattice Semiconductor, and Xcerra sale to Hubei Xinyan.

The US is concerned about China gaining an advantage on the world-stage by acquiring US talent, although the US has a long history of acquiring such talent from the rest of the world. It frequently cites military or government supply chain concerns in these denials, and allegations of Chinese state spying through compromised technology are pretty rampant here.

Huawei and ZTE (a major Qualcomm customer) fell afoul of these concerns, but perhaps the most high-profile was Broadcom’s attempt to buy Qualcomm, back in March 2018. That transaction was valued at $117bn, a truly colossal figure, but the capricious president Trump said that “there is credible evidence” that Broadcom “might take action that threatens to impair the national security of the United States.” The issue was not so much with Broadcom giving secrets to the Chinese state, more that Broadcom’s actual owner Avago would continue its track record of dismantling its acquisitions – weakening Qualcomm and thus the US’s position in 5G, allowing Huawei and China to take the lead.

Against the backdrop of blocked deals, there has been the tit-for-tat foreign import tariff dispute between the US and China, which has escalated somewhat in recent weeks, and all that time, the Chinese regulator has been waiting to issue its decision – with Qualcomm announcing near weekly extensions to the offer to the NXP shareholders. Around two-thirds of Qualcomm’s global revenue is attributable to China, according to Reuters, which is why the regulator was so concerned at the scale of the acquisition.

The deal was first announced in October 2016, when Qualcomm’s stock stood at $68.40. NXP was valued at $99.78 per share back then. As of writing, Qualcomm is worth $59.42 a share, and NXP stands at $98.37. Qualcomm’s share price was damaged by the Broadcom takeover attempt, as well as the ongoing licensing litigation with Apple, falling as low as $49.75.

NXP, meanwhile, had grown pretty consistently since the deal was announced, reaching a high of $125.44 in February 2018 before dropping to a low of $99.01 in May. Since then, it grew, rising to $120, but then began falling as the self-imposed deadline loomed larger and larger.

When first announced, the deal was worth $38bn, but NXP shareholders were resistant. The larger $44bn bid arrived in February 2017, but now those shareholders are going to have to see whether dragging their heels will have been their ruin. Perhaps a quicker buyout wouldn’t have fallen afoul of the influence of the Trump tariffs.

NXP will retain its focus on low-power IoT chips, and hopefully expand on its reputation in the automotive sector. Qualcomm had looked at NXP as an easy way into the IoT, but had taken steps into this world itself, focused on new devices like drones, machine-vision enabled cameras, and AR/VR devices. It will likely continue this journey without NXP, especially as its core mobile chips are being shaken up.

Due to the litigation, Apple has decided to ditch the Qualcomm modems it uses in its iPhone ranges, opting to use Intel chips instead – even though Qualcomm’s design outperform Intel’s versions. Qualcomm CFO George Davis announced the news in an analyst call, but now we could see Qualcomm look to challenge Intel in these emerging IoT areas. Intel is pretty keen on drones and machine-vision too, although it did throw in the towel on its low-power IoT chips – likely because it couldn’t see enough margin in them.

So both Qualcomm and NXP are free to go their own way in the IoT, but what does this mean for future M&A and consolidation? Well, before this, there was a trend for ‘national security concerns’ to be a trump card to block a deal by a foreign company, and it looks like that is going to continue. Outside of technology, Chinese firms have been blocked from buying stock exchanges (Chicago, USA), and construction companies (Aecon, Canada).

It’s unclear if China would begin retaliating, stopping outside companies from acquiring its most promising startups, as Xilinx has done this week with DeePhi. It could also clamp down on its own firms, due to concerns with currency leaving the country via these acquisitions – something it has tried to crack down on for overseas property and cryptocurrencies too.

Consequently, there might be a slowdown in the M&A markets, as a result of this action. Investors are going to be wary of the long and drawn-out process, which could be derailed by an unfortunately timed tweet. CEOs aren’t going to want to stake their futures on mega-acquisitions that might never come to pass. As such, these giant deals are going to slow, in our opinion.

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