Qualcomm Inc. (NASDAQ: QCOM) – market cap as of 04/11/2016: $96.54bn
NXP Semiconductors NV (NASDAQ: NXPI) – market cap as of 04/11/2016: $34.15bn
Introduction
On October 27, 2016, Qualcomm Incorporated and NXP Semiconductors N.V. announced a $47bn agreement in which Qualcomm is to acquire all of the outstanding shares of NXP. This is the largest semiconductor deal in history and represents Qualcomm’s attempt to diversify from the mobile industry and establish a strong foothold in the automotive semiconductor industry.
Qualcomm Incorporated Overview
The company was founded in 1985 in San Diego (CA) and is currently a world leader in smartphone processors and wireless network technology.
Qualcomm Incorporated consists of the licensing business – QTL, and the subsidiary Qualcomm Technologies, which operates the semiconductor business – QCT. Qualcomm has completed over 40 acquisitions since its foundation and it is today’s leader in the smartphone processor market with over 30% market share as well as over 50% market share in the baseband processor market.
2015 was quite turbulent for Qualcomm. The Snapdragon 810 processor, used in most flagship android phones, had severe overheating and performance problems. Naturally, Qualcomm’s competitors MediaTek and Apple benefited greatly. Furthermore, the failure of the 810 caused Qualcomm’s biggest client – Samsung – to develop their own processor, and spawned rumors about Huawei also developing a proprietary chip.
The loss of trust started to dissipate in 2016, when Samsung used both their own as well as Qualcomm’s new processor in their new flagship devices. The Snapdragon 820 and 821 put Qualcomm back on track with unprecedented performance and faster charging than their competitors’ chips.
Qualcomm’s revenue figures in 2016 (FYE September 2016) amounted to $23.6bn, whereas the figure stood at $25.3bn in 2015.
NXP Semiconductors Overview
NXP is a semiconductor company headquartered in Eindhoven (Netherlands), providing a wide range of solutions for automotive, identification, wireless infrastructure, lighting, industrial, mobile, consumer and computing applications. Established in 2006, it was formerly a division of Philips; now it operates in more than 25 countries and owns 11 manufacturing sites worldwide, serving customers such as Apple, Bosch, Panasonic and Sony.
NXP is a public limited company since its initial public offering on May 21, 2010, when the firm listed its shares on the NASDAQ. Its business is structured in two main segments: High Performance Mixed Signal Solutions and Standard Products. The first category consists of application-specific semiconductors, while the second delivers generic devices, adaptable to many different types of electronics equipment.
The company is currently focusing on a strategic selection (through specific divestments and focused acquisition) of the most profitable and potentially long-term successful business segments and it recently merged with Freescale Semiconductor, aiming to be the market leader in automotive, micro controller and security semiconductor solutions.
On a full-year basis, NXP reported $6.1 billion revenues (up 8 percent from 2014) for FY2015. The reported operating income was $2.0 billion, representing a twofold increase YoY, while net income was $1.5 billion, approximately three times higher than previous year’s net income of $539 million. These results incorporate the sale of the Bipolar business and of RF Power Business that occurred in the second half of 2015.
Deal structure
Qualcomm will acquire NXP Semiconductors for $47bn enterprise value. The offer values NXP’s equity at $110 per share, an 11.5% premium on NXP’s closing share price on the day prior to the announcement.
The transaction is going to be financed through existing cash and $11bn new debt. The offer multiple appears in line with the semiconductors industry average of 16x-18x EV/EBITDA: Qualcomm will indeed pay NXP at about 17.6x its LTM adjusted EBITDA. Despite that, the 11.5% control premium is significantly below the 30% paid on average in comparable transactions, but this seems to be the result of negotiations that saw NXP willing to give up a high premium to get an all-cash bid.
According to Qualcomm’s press release the transaction is expected to close by the end of calendar 2017 and is subject to receipt of regulatory approvals in various jurisdictions and other closing conditions. Moreover, the tender offer is conditioned on the tender of at least 95% of the outstanding ordinary shares of NXP or, if NXP shareholders approve the asset sale contemplated in the purchase agreement, the tender of at least 80% of the outstanding ordinary shares of NXP.
Strategic rationale
The agreement is the most recent in a $200bn wave of deals in the semiconductor industry since the beginning of 2015. This wave is the result of an uncertain market situation for many chip makers, seeing some important business segments – such as those for smartphones and personal computers – reaching a mature state with extremely low growth or no growth at all. Thus, semiconductor players have to establish dominant positions in the now-trending business segments. The automotive industry with its skyrocketing demand for chip components led by recent technological breakthroughs is becoming extremely important for chip-makers, software developers and startups.
Qualcomm derives more than 50% of its profits from patent licensing to phone-makers; the poor outlook for this business makes diversification a main imperative. For this reason, Qualcomm eyed NXP for its expansion in the automotive industry, attracted by the Dutch company’s position in this specific chip-market and by its connections with big auto-makers and their major suppliers. Moreover, the acquisition of NXP should drastically improve Qualcomm’s position in the “Internet of Things” through the utilization of various microcontrollers.
Apart from the projected annualized cost synergies, which are estimated to be worth $500m, Mr Steven Mollenkopf – Qualcomm’s CEO – expects “a lot of expertise coming in” if the integration will be carried out correctly. Still, the company will have to face issues such as integrating the 44,000 NXP employees with Qualcomm’s 30,000, and the adaptation of older factories, inheritance of Philips and Motorola’s operations.
On a taxation standpoint, NXP is a wise choice for its tax-favorable country of incorporation and Qualcomm will use “tax-efficient” financing for the deal, exploiting its $28.6bn offshore cash. The principle is simple – Qualcomm is not required to pay U.S. tax on the cash generated and kept abroad. Therefore, a new Amsterdam-based subsidiary, Qualcomm River Holdings B.V., is responsible for the tender offer.
Lastly, Qualcomm is committed to anti-dilutive repurchases of its common stock as it de-levers its balance sheet to pre-transaction leverage levels. The pro forma cash flow profile of Qualcomm post acquisition provides a strong foundation for long-term capital returns to stockholders. In addition, Qualcomm expects the transaction to be significantly accretive to non-GAAP EPS immediately upon close.
Market reaction
The offer values NXP shares at $110 each, which represents a 34% premium over NXP share price before rumors about the deal were reported on Sept. 29, and a 11.5% premium on NXP’s closing share price on the day prior to the deal announcement. Qualcomm’s stock rose 13% giving the company a market value of $100bn, signaling that Qualcomm’s shareholders approve the company’s consolidation plans. In total, the deal added a combined $18 billion to the value of the two companies.
Advisers
Goldman Sachs, Centerview and Evercore advised Qualcomm while Qatalyst Partners, Barclays and Credit Suisse were financial advisers to NXP.
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