Qualcomm and NXP Semiconductors are reportedly just $10 a share apart in price negotiations over their potential merger. What would a deal look like if they just met in the middle?
Talks between the two companies are moving forward and Qualcomm is now the only buyer pursuing NXP after rivals Intel and Texas Instruments decided against a bid, according to a Bloomberg News report on Thursday afternoon. But NXP wants a price of about $120 a share, while Qualcomm would like to pay something more like $110.
At the midpoint of $115, a deal would value NXP at about $47 billion including debt. There have been a lot of chipmaker takeovers lately, but none have been that big. There's only one acquisition in the entire technology sector that's been larger: Dell's $60 billion-plus tie-up with EMC. But big doesn't always mean expensive, as I've previously noted. A price of $115-a-share works out to just under 14 times NXP's projected Ebitda for 2016. The median multiple paid in large chipmaker deals in the recent takeover frenzy is nearly 20, and Avago paid an even higher valuation for Broadcom.
Not that NXP would be selling on the cheap. A bid of $115 would top its previous all-time high and well surpass the price analysts were estimating it would reach on its own over the next year. There's a reason semiconductor companies are doing so many deals, and it's not because the industry is on the up and up. Not taking the opportunity to cash out at this high price now would be a mistake.
The other issue still to be decided is the composition of an offer. NXP would reportedly prefer an all-cash deal, but Qualcomm wants to cover a quarter of the purchase price with its stock.
NXP's preference for cash is understandable, especially given the recent performance of Qualcomm's stock. Over the last five years, shares of the $100 billion company have seen only a quarter of the gains enjoyed by the Philadelphia Stock Exchange Semiconductor Index.
But there's reason for optimism, if Qualcomm investors' reaction to the deal speculation is anything to go by. Qualcomm's stock has climbed about 6.5 percent since reports of its talks with NXP first surfaced last week. It's rare to see an acquirer climb by that much, especially when a deal is so large and would involve a strategic shift (NXP is the largest maker of chips for cars, whereas Qualcomm focuses on smartphones). But this transaction is just so accretive. Qualcomm is also sitting on about $31 billion in cash and equivalents, a large part of which is trapped overseas. NXP's Netherlands home base would allow it to put that money to work. At $115 a share, a 40 percent premium to NXP's unaffected price, a deal would easily add to Qualcomm's earnings even before synergies, according to data compiled by Bloomberg.
If you believe these companies will be stronger together than apart, maybe it's not such a bad idea to hold onto a chunk of their future. Either way, a $10-a-share difference shouldn't stand in the way.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
It's not clear if these estimates account for the sale of NXP's standard products unit which should be completed next year, but even if the numbers are adjusted to account for the loss of that business' operating income, the multiple is still below the industry median.
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