Qualcomm walks Away from $43 Billion NXP Acquisition as China Balks at Approving the Deal

Qualcomm has abandoned its $43 billion acquisition of Dutch automotive chip maker NXP Semiconductors as Chinese regulators balked at approving the deal amid rising U.S.-China trade tensions.

The San Diego company said on Wednesday that it would step away from the merger at 9 p.m. Pacific Time unless China came through with a last-minute approval.

That deadline passed without a green light from regulators. Qualcomm has now officially confirmed that the merger is dead, and Chief Executive Steve Mollenkopf made the company’s stance clear during Qualcomm’s fiscal third quarter earnings conference call Wednesday afternoon.

“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,” said Mollenkopf.

Meanwhile, Qualcomm posted better than expected quarterly earnings — fueled by an unexpected $500 million patent royalty payment from a smartphone maker that’s in a dispute with Qualcomm.

Qualcomm didn’t identify the device maker, but it is believed to be Huawei. The two companies have been in talks for months over patent fees. Qualcomm called the $500 million a “good faith payment” of past royalties that indicate negotiations, for now, are headed in a positive direction.

The death of the NXP deal brings to an end a 21-month saga to complete the largest merger ever proposed in the semiconductor industry.

Regulators in eight other countries approved the merger. China remained the lone holdout. The Qualcomm-NXP combination appears to become entangled in the Trump administration’s tariffs on a rising number of Chinese imports and that country’s steps to retaliate.

“It was very clear to us that the macro environment was very difficult to get something of this size through, and it was not clear that was going to change in the future dramatically – particularly in the time window that we had to really move,” Mollenkopf told Wall Street analysts.

Qualcomm is expected to pay a $2 billion breakup fee on Thursday to NXP, which Qualcomm first agreed to buy in October 2016.

The San Diego cellular technology giant plans to use up to $30 billion earmarked for the NXP purchase to buy back its own shares. The move aims to deliver an increase of $1.50 per share in adjusted annual earnings in 2019 that executives promised shareholders in the midst of Broadcom’s failed hostile takeover bid earlier this year.

The buyback target is equal to what NXP would have delivered to Qualcomm’s bottom line had the deal gone through.

“The company promised accretion by hook or by crook,” said Stacy Rasgon, an analyst with Bernstein Research. “There are not a whole lot of other things they could buy that would be as accretive as NXP. You can’t promise Wall Street something and then take it away.”

Calling it quits now strikes a blow to Qualcomm’s efforts to diversify its business beyond the stagnant smartphone market, where it faces headwinds from slowing sales, rising competition and customer disputes with Apple and Huawei over patent fees.

With NXP, Qualcomm would have become a chip powerhouse with a much larger product portfolio of semiconductors used for mobile payments, security, automotive micro-controllers and sensors and industrial Internet of Things products.

Qualcomm also would have gained new distribution channels and NXP’s significant intellectual property portfolio. There was little product overlap between the two companies.

The deal’s collapse “doesn’t necessarily negatively position NXP or Qualcomm,” said Jim McGregor, principal analyst with Tirias Research. “Both have continued on with their product plans. It makes it a little bit harder to go after (alternative markets). Qualcomm has had success in those segments, but not nearly to the level of NXP.”

Now Qualcomm must try to grow into at least some of these markets on its own.

While it is making progress – the company said it has a $5 billion backlog in orders from car makers – its diversification efforts are likely to narrow and take more time.

“The deal has been headed south for a while,” said San Diego State University finance lecturer, Seth Kaplowitz. “I think Qualcomm has enough rocket fuel to return to growth. It is not going to happen overnight.”

For its third quarter, Qualcomm reported sales of $5.6 billion and earnings of $1.2 billion, or 82 cents per share, for the quarter under Generally Accepted Accounting Principles.

For the same quarter last year, Qualcomm posted revenue of $5.4 billion and earnings of $900 million, or 58 cents per share under GAAP.

On an adjusted basis, which is how Wall Street analysts track results, Qualcomm reported non-GAAP sales of $5.6 billion and earnings of $1.01 per share for the June quarter.

That beat analysts’ forecast of 71 cents per share in earnings on sales of $5.19 billion.

The company sold 199 million mobile chips in the quarter, slightly ahead of analysts’ estimates of 191 million shipments.

Its patent licensing business performed better than expected, with revenues of $1.47 billion in quarter. Analysts forecast patent licensing revenue at $976 million.

The gain in patent licensing stemmed from the $500 payment from the smartphone maker, Huawei, and lower than expected legal expenses in Qualcomm’s ongoing legal war with Apple over patents.

The Apple fight continues to take its toll on Qualcomm. The company said Apple will not use its cellular modems in upcoming new iPhones models released this fall.

Intel, which currently supplies modem chip for about half of Apple’s iPhones, will likely be the beneficiary. Qualcomm’s chips will continue to be used in older iPhones.

Looking ahead, Qualcomm forecast sales of $5.1 billion to $5.9 billion for the current quarter ending in Sept. 30. Adjusted earnings are expected to come in at 75 cents to 85 cents per share.

Qualcomm released financial results after markets closed. Its shares ended trading Wednesday up 57 cents at $59.42 on the Nasdaq.

The stock jumped 5 percent to $62.80 in early after-hours trading. – The Sandiego Union Tribune