China flexes muscles by scuppering $44bn chip deal

Qualcomm admits defeat in NXP takeover bid

Qualcomm’s profits have been hit by its wide-ranging legal battle with Apple over royalties.

Qualcomm’s profits have been hit by its wide-ranging legal battle with Apple over royalties.

 

Qualcomm admitted defeat in its attempted $44 billion (€37.6 billion) takeover of Dutch chipmaker NXP after failing to win approval from Chinese regulators for what would have been the semiconductor industry’s largest ever takeover.

The companies’ agreement expired just before midnight in New York on Wednesday without any indication that they had obtained antitrust clearance from Beijing, despite the deal being signed off by eight other regulators around the world.

After being shielded by the Trump administration from Broadcom’s hostile approach four months ago, Qualcomm has now become the highest-profile American victim of the US-China trade war.

China’s inaction on regulatory approval for a deal involving a big US technology company has been seen as retaliation for US president Donald Trump’s tariffs on Chinese imports, although Geng Shuang, a spokesman for China’s foreign ministry, said on Thursday that the deal had been reviewed in accordance with the anti-monopoly law.

Collapse

The deal’s collapse could also prove costly for the hedge funds that had piled into NXP over the past few months, and now own more than a third of its shares. Shares in the Dutch group fell 12 per cent to as low as $86.50 before the US market opened, well below the $127.50 offer that it had accepted from Qualcomm.

Paul Singer’s Elliott Management was one of the top shareholders in NXP as of June 5th, while hedge funds, including Pentwater Capital, Soroban, DE Shaw, Farallon, Och-Ziff, York Capital, Arrowgrass and Tyrus Capital, all held large stakes in the company as of March 31st as well.

Steve Mollenkopf, Qualcomm’s chief executive, conceded defeat earlier on Wednesday after a two-year effort to close the NXP tie-up. Instead, he announced a $30 billion share buyback programme.

“We intend to terminate our purchase agreement to acquire NXP when the agreement expires at the end of the day today, pending any new material developments,” Mr Mollenkopf said on Wednesday afternoon.

On a conference call with analysts, he added: “The decision for us to move forward without NXP was a difficult one . . . To say the least, the 21 months since we announced the NXP acquisition have been volatile.”

Mr Mollenkopf said Qualcomm ultimately decided that there was not a “high probability” of a near-term change in the “current geopolitical environment” that would allow the deal to close. Qualcomm plans to complete a “large majority” of its $30 billion share buybacks before the end of its fiscal 2019, in September next year.

Results

The company on Wednesday also reported results that were “significantly above our prior expectations”. Revenues increased 6 per cent to $5.6 billion, ahead of Wall Street’s estimates, with net income up 41 per cent to $1.2 billion. Shares in Qualcomm jumped 6 per cent in after-hours trading.

And the company revealed a piece of long-anticipated news on its analyst call: Apple will not be using its modems in the next generation of iPhones, amid legal battles between the two companies.

“We believe Apple intends to solely use our competitor’s modems, rather than our modems, in its next iPhone release,” said Qualcomm’s chief financial officer George Davis. “We will continue to provide modems for Apple legacy devices.”

Before the close of trading on Wednesday, Qualcomm’s shares had been 10 per cent below where they were at the start of 2018, when they were buoyed by the offer from Broadcom. Mr Trump’s blocking of the bid in March on national security grounds marked an unprecedented intervention by the White House.

Qualcomm’s profits have been hit by its wide-ranging legal battle with Apple over royalties. Apple’s litigation began in January 2017, just a few months after the NXP deal was agreed in October 2016.

Mr Mollenkopf will now come under pressure from Qualcomm’s investors to show how the San Diego-based chipmaker can diversify from its mainstay of chips for smartphones into the “internet of things” without the anticipated boost from NXP, which has a bigger business in the automotive and security industries.

Geoff Blaber, analyst at CCS Insight, said the resolution to the drawn-out NXP saga was a “good thing” for Qualcomm investors because it provided “increased certainty”.

“At some point you have to get on and manage the business. You can’t wait for something indefinitely,” Mr Blaber said. However, the company’s need to diversify remains. “This deal was all about [the internet of things] and the reality is that IoT is growing but still relatively small in the grand scheme of Qualcomm’s business.”

Qualcomm’s offer for NXP, which was increased from $110 a share in February amid pressure from activist investors, was set to expire just before midnight US eastern time on Wednesday.

A spokeswoman for Elliott, who earlier this year argued that NXP was worth $135 per share and was part of a group of nine hedge funds who agreed to support a $127.50 revised deal with Qualcomm, declined to comment.

Failure to complete the transaction will trigger a $2 billion break-up fee that Qualcomm must pay immediately to NXP.

“While it is unfortunate that the semiconductor powerhouse that would have resulted from the transaction with Qualcomm could not close after 21 months of diligent efforts by the team, we are confident in our future as an independent market leader,” said Richard Clemmer, NXP chief executive said. – Copyright The Financial Times Limited 2018