Missed Opportunity

Qualcomm's NXP Fumble May Cost It the Game

A surer deal for the automotive chipmaker would have given it more ammunition to fend off Broadcom's takeover proposal.
Photographer: Michael Reaves/Getty Images
QUALCOMM INC
-0.01
At Closing, January 19th
68.04 USD
NXP SEMICONDUCTORS NV
+0.45
At Closing, January 19th
120.45 USD

Qualcomm Inc.'s dawdling over its offer for NXP Semiconductors NV has only made the chipmaker more susceptible to advances from Broadcom Ltd.

Broadcom is contemplating a proxy fight at Qualcomm after the latter company rejected its $70-a-share takeover proposal, betting it can harness shareholders' frustration over a slipping stock price to pressure its target into negotiating a deal. Qualcomm's vulnerability is derived in part from its war with Apple Inc. and antitrust authorities over its lucrative licensing business, but also from the uncertainty over its plan B should none of that work out in its favor. Qualcomm's strategy of plumping up revenue with the fast growth of NXP's automotive chips has hit a major roadblock. And for that, it has only itself to blame.

What Else You Got?

Qualcomm makes the majority of its pretax earnings from royalties it collects from its technology. NXP would have helped diversify it. Annual pretax earnings by segment:

Source: Qualcomm

Note: Segment earnings exclude reconciling items.

Qualcomm's pursuit of NXP has dragged on for more than a year as it works through a drawn-out antitrust process. But even with regulatory signoff -- which looks more and more likely -- Qualcomm can't close the deal without buy-in from NXP holders. And they aren't too keen to give their support: As of Nov. 16, just 2.4 percent of NXP holders had tendered their shares. Qualcomm needs 80 percent to get a deal done.

Importantly, this isn't a recent development. Qualcomm's $110-a-share offer has looked cheap from the get-go, valuing NXP at a discount to recent takeovers of chipmakers with similar growth prospects. The valuation mismatch has only deepened as momentum builds for smarter cars, sending NXP's peers soaring. It's been clear for a while now that the NXP proposal as currently outlined wasn't going to cut it, especially after activist investor Elliott Management Corp. got involved. Take a look at the tender count over time.

No Thanks

Qualcomm needs 80 percent of NXP holders to tender their shares. It's got a ways to go.

Source: Bloomberg

At this point, it's clear that Qualcomm should have taken that shareholder angst more seriously and raised its offer sooner. Game theory is tricky, but let's consider what might have been had Qualcomm increased its bid over the summer to somewhere in the range of $130 or $140 a share, consistent with the multiples in similar transactions. That may have been enough to appease Elliott and other holders, making a done deal only a matter of regulatory approval. With an NXP takeover a surer thing, Qualcomm would be better able to defend itself against Broadcom's unwanted acquisition broadsides. Including that purchase, especially at a richer price, in the overall Qualcomm package also makes a transaction a lot more expensive and doubly complicated for Broadcom from a regulatory and integration perspective.

But instead, Qualcomm played a game of chicken over NXP and now it's in a bit of a bind. Broadcom has said its bid for Qualcomm stands if the NXP takeover happens at the current price or if that deal falls apart, notably leaving out the third option of the transaction happening at a higher price. Should Qualcomm aggressively raise its offer for NXP at this stage, it will be accused of trying to thwart Broadcom's takeover interest.

Divergent Paths

NXP's strong performance has helped boost its shares. Qualcomm has been helped by the Broadcom bid, but the stock is still lower than it was at the time of the NXP announcement.

Source: Bloomberg

This may all end up working out OK for shareholders. NXP investors have been adamant that Qualcomm's current bid is sub-par and they'd be happier to see the company stand alone. Qualcomm holders have indicated they'd be willing to sell if Broadcom can raise its offer by at least $10 a share, at which point they probably don't care so much what happens to NXP. But Qualcomm did have a strategy when it made its NXP overture; the fact that few give it much credence at this point is a good reminder to never put off 'til tomorrow what you can do today.

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

    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

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