Deals

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Shareholders of NXP Semiconductors NV have reason to be disappointed with the final terms of its $47 billion sale to Qualcomm Inc.

The two chipmakers announced their plans to merge on Thursday after weeks of speculation about a possible deal. In the end, Qualcomm offered NXP holders $110 a share in cash -- on the low end of the range that Bloomberg News had reported the chipmakers were discussing. Qualcomm shareholders knew they were getting a good deal, and the buyer's stock rose as much as 4.8 percent -- more than double the gains of NXP. Both companies have climbed since news of their deal talks was first reported in late September.

Lockstep
You don't often see both the acquirer and the target rise on news of deal talks. Qualcomm continued its gains on Thursday
Source: Bloomberg

It's not clear why NXP backed down from its push for a price closer to $120. Perhaps it conceded on price having gotten the all-cash bid it was seeking. Or the absence of other suitors (Intel Corp. and Texas Instruments Inc. decided against bidding) reduced NXP's negotiating leverage. I've previously suggested that meeting in the middle at $115 might be appealing for NXP because that price would top both the company's previous high and analysts' unaffected price targets, while still offering a relative bargain for Qualcomm. 

NXP traded as high as $112.25 last year in the wake of its announcement to buy Freescale Semiconductor Ltd. for about $17 billion including debt (the deal closed in December). Before news of Qualcomm's interest in acquiring NXP, analysts were targeting a stock price of more than $108 for the company over the next 12 months. Heading into Thursday, those estimates had climbed to more like $113.

Aiming Higher
Analysts had higher hopes for NXP's valuation
Source: Bloomberg

Shareholder feedback I received following my last story suggests that at least some investors had their eye on an even bigger price tag than what was on the table in the Qualcomm and NXP negotiations. The current offer values NXP at about 13 times its projected 2017 Ebitda, compared with the 18 times forward profit that Analog Devices Inc. agreed to pay for Linear Technology Corp. That deal, valued at about $13 billion after subtracting net cash, was announced in July. If the Linear multiple was applied to NXP, you could get to a price tag of more than $160.

Now, an offer that high isn't going to happen, but why shouldn't NXP be valued more like some of its acquired peers? It's set to increase revenue in 2017 and 2018 at around the same pace that analysts are forecasting for Linear. And NXP is certainly on track to grow a lot faster than Qualcomm is.

Growth Driver
NXP is projected to increase revenue at about the same pace as Linear Technology over the next few years. Qualcomm is forecast to lag behind both.
Source: Bloomberg
The companies operate on different fiscal calendars. Qualcomm's fiscal year ends Sept. 30, while Linear's ends June 30. NXP operates on a calendar year schedule. The surge in NXP's revenue in 2016 is due to its purchase of Freescale, which closed in December of last year.

This is a large and risky takeover for Qualcomm that will diversify the chipmaker into industries where it doesn't have as much experience. (NXP is a leading maker of semiconductors used in cars, while Qualcomm's focus has been on mobile-phone chip technology). That could make the company reticent to increase its offer, although the $500 million in cost savings it expects to reap from the deal by year two could help soften the blow of a higher bid.

There's also the question of regulatory scrutiny. NXP and Qualcomm don't have much overlap, but any deal of this magnitude is bound to draw scrutiny -- especially in the European Union, where Qualcomm is already fighting antitrust fires. It will also take a long time to close. That's why NXP is still trading so far below Qualcomm's offer. Moreover, investors may be wondering what happened to the lofty goals NXP has set for itself, including improved margins.

NXP management has decided the company is stronger with Qualcomm. That may be so, but that doesn't mean shareholders will accept a low-ball price. And they're now in the driver's seat.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. I used 2017 Ebitda to account for both the Freescale purchase and the divestiture of NXP's standard products business which was announced earlier this year. 

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net